Leading ARC Group Worldwide Inc (NASDAQ:ARCW) as the CEO, Drew Kelley took the company to a valuation of US$36.61M. 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. Today we will assess Kelley’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 ARC Group Worldwide
Did Kelley create value?
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. Recently, ARCW produced negative earnings of -US$20.68M , which is a further decline from prior year’s loss of -US$2.94M. However, ARCW hasn’t always been loss-making, with an average EPS of US$1.14 over the past five years. During times of unprofitability the company may be incurring a period of reinvestment and growth, or it can be an indication of some headwind. In any case, CEO compensation should represent the current state of the business. In the latest financial report, Kelley’s total compensation grew by 51.14% to US$627.01K.
What’s a reasonable CEO compensation?
Though there is no cookie-cutter approach, since remuneration should be tailored to the specific company and market, we can estimate a high-level thresold to see if ARCW deviates substantially from its peers. This exercise can help shareholders ask the right question about Kelley’s incentive alignment. Normally, a US small-cap has a value of $1B, creates earnings of $96M, and remunerates its CEO at roughly $2.7M per annum. Normally I would use earnings and market cap to account for variations in performance, however, ARCW’s negative earnings lower the usefulness of my formula. Analyzing the range of remuneration for small-cap executives, it seems like Kelley is being paid within the bounds of reasonableness. On the whole, although ARCW is unprofitable, it seems like the CEO’s pay is fair.
Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in ARCW, proper governance on behalf of your investment should be a key concern. These decisions made by top management and directors flow down into financials which impact returns to investors. 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 ARCW’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 ARCW? 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.