Handong Cheng took the helm as ChinaNet Online Holdings Inc’s (NASDAQ:CNET) CEO and grew market cap to US$32.33M recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. Today we will assess Cheng’s pay and compare this to the company’s performance over the same period, as well as measure it against other US CEOs leading companies of similar size and profitability. See our latest analysis for ChinaNet Online Holdings
What has been the trend in CNET’s earnings?
Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. Most recently, CNET produced negative earnings of -US$6.29M . However, this is an improvement on prior year’s loss of -US$6.86M, which may signal a turnaround since CNET has been loss-making for the past five years, on average, with an EPS of -US$0.16. Since earnings are heading towards the right direction, CEO pay should be reflective of Cheng’s value creation for shareholders. During the same period, Cheng’s total remuneration dropped by a marginal -1.49%, to US$853.83K. In addition to this, Cheng’s pay is also made up of 13.26% non-cash elements, which means that fluxes in CNET’s share price can affect the true level of what the CEO actually receives.
Is CNET’s CEO overpaid relative to the market?
Despite the fact that one size does not fit all, since remuneration should be tailored to the specific company and market, we can estimate a high-level base line to see if CNET is an outlier. This outcome can help shareholders ask the right question about Cheng’s incentive alignment. Typically, a US small-cap is worth around $1B, creates earnings of $96M, and remunerates its CEO circa $2.7M annually. Usually I’d use market cap and profit as factors determining performance, however, CNET’s negative earnings lower the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Cheng is being paid within the bounds of reasonableness. Overall, although CNET is unprofitable, it seems like the CEO’s pay is reflective of the appropriate level.
You can breathe easy knowing that shareholder funds aren’t being used to overpay CNET’s CEO. However, on the flipside, you should ask whether Cheng is appropriately remunerated on the basis of retention. Its important for shareholders to be active in voting governance decisions, as board members are only representatives of investors’ voices. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
- Governance: To find out more about CNET’s governance, look through our infographic report of the company’s board and management.
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of CNET? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.