Drew Sims took the reins as CEO of Sotherly Hotels Inc’s (NASDAQ:SOHO) and grew market cap to US$107.48M recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. Incentives can be in the form of compensation, which should always be structured in a way that promotes value-creation to shareholders. Today we will assess Sims’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 Sotherly Hotels
What has SOHO’s performance been like?
Earnings is a powerful indication of SOHO’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Sims’s performance in the past year. Most recently, SOHO delivered negative earnings of -US$5.43M , compared to the previous year’s positive earnings. However, on average, SOHO has been loss-making in the past, with a 5-year average EPS of -US$0.14. In the situation of negative earnings, the company may be facing a period of reinvestment and growth, or it can be a signal of some headwind. Regardless, CEO compensation should emulate the current condition of the business. In the most recent financial report, Sims’s total compensation grew by a mere 1.35% to US$817.63K. Furthermore, Sims’s pay is also made up of 2.94% non-cash elements, which means that variabilities in SOHO’s share price can impact the actual level of what the CEO actually collects at the end of the year.
Is SOHO overpaying the CEO?
Despite the fact that one size does not fit all, as compensation should account for specific factors of the company and market, we can estimate a high-level benchmark to see if SOHO deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Sims’s incentive alignment. Generally, a US small-cap has a value of $1B, creates earnings of $96M, and pays its CEO at roughly $2.7M per annum. Typically I would look at market cap and earnings as a proxy for performance, however, SOHO’s negative earnings lower the usefulness of my formula. Looking at the range of compensation for small-cap executives, it seems like Sims is being paid within the bounds of reasonableness. On the whole, though SOHO is loss-making, it seems like the CEO’s pay is reflective of the appropriate level.
Hopefully this article has given you insight on how shareholders should think about SOHO’s governance policies such as CEO pay. As an investor, you have the right to understand how the board thinks about management incentives, and also the right to vote for and against substantial CEO pay changes. Governance is a big factor in investing, and I encourage you to dig deeper into those that represent your voice on the board. 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 SOHO’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 SOHO? 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.