E. Santi took the helm as Illinois Tool Works Inc’s (NYSE:ITW) CEO and grew market cap to US$45.66b recently. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. 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 Santi’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.
Did Santi 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, ITW delivered a profit of US$1.88b compared to its prior year’s earnings of US$2.17b – a decline of -13.1%. However, ITW has strived to maintain a good track record of profitability, given its average EPS of US$4.82 over the past couple of years. In the situation of declining earnings, the company may be incurring a period of reinvestment and growth, or it can be an indication of some headwind. Regardless, CEO compensation should emulate the current condition of the business. In the latest report, Santi’s total compensation rose by 15.3% to US$17.1m. Furthermore, Santi’s pay is also made up of 56.12% non-cash elements, which means that variabilities in ITW’s share price can move the true level of what the CEO actually collects at the end of the year.
Is ITW overpaying the CEO?
Despite the fact that no standard benchmark exists, since compensation should account for specific factors of the company and market, we can determine a high-level yardstick to see if ITW is an outlier. This outcome helps investors ask the right question about Santi’s incentive alignment. Typically, a US large-cap is worth around $64.9B, produces earnings of $3.6B and pays its CEO circa $12.2M per year. Considering ITW’s size and performance, in terms of market cap and earnings, it seems that Santi is compensated more than other US CEOs of profitable large-caps. Although this is simply a high-level estimate, investors should be aware of this expense.
What this means for you:
CEO pay is one of those topics of high controversy. Nonetheless, it should be talked about with full transparency from the board to shareholders. Why is Santi remuneration above that of similar companies? Is this justified? As a shareholder, you should be aware of how those that represent you (i.e. the board of directors) make decisions on CEO pay and whether their incentives are aligned with yours. 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 ITW’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 ITW? 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 past 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. For errors that warrant correction please contact the editor at email@example.com.