Why Inotek Pharmaceuticals Corporation’s (NASDAQ:ITEK) CEO Salary Matters To You
David Southwell took the helm as Inotek Pharmaceuticals Corporation’s (NASDAQ:ITEK) CEO and grew market cap to US$87.11M recently. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. I will break down Southwell’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. View our latest analysis for Inotek Pharmaceuticals
What has been the trend in ITEK’s earnings?
Profitability of a company is a strong indication of ITEK’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Southwell’s performance. Over the last year ITEK released negative earnings of -US$37.60M . But this is an improvement on prior year’s loss of -US$38.05M, which may signal a turnaround since ITEK has been loss-making for the past five years, on average, with an EPS of -US$5.71. Given earnings are moving the right way, CEO pay should mirror Southwell’s valued-adding activities. In the same year, Southwell’s total remuneration more than doubled, reaching US$4.06M . Although I couldn’t find information on the breakdown of Southwell’s pay, if some portion were non-cash items such as stocks and options, then variabilities in ITEK’s share price can move the actual level of what the CEO actually collects at the end of the year.
Is ITEK’s CEO overpaid relative to the market?
Even though no standard benchmark exists, as compensation should be tailored to the specific company and market, we can estimate a high-level yardstick to see if ITEK is an outlier. This outcome can help direct shareholders to ask the right question about Southwell’s incentive alignment. On average, a US small-cap has a value of $1B, creates earnings of $96M, and remunerates its CEO at roughly $2.7M per year. Typically I’d use market cap and profit as factors determining performance, however, ITEK’s negative earnings reduces the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Southwell’s pay outstrips those in comparable companies.
What this means for you:
ITEK may be paying its CEO above-market rates due to many reasons – retention, reward, or inflated non-cash components of total pay. However, shareholders also should be aware of what the appropriate level is. Boards should be transparent with how they structure CEO pay given that there should be nothing to hide in public companies. Hopefully this analysis has given you the basis for questioning the next CEO pay raise. If you have not done so already, I urge you to complete your research by taking a look at the following:
Governance: To find out more about ITEK’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 ITEK? 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.
