Leading Legacy Reserves LP (NASDAQ:LGCY) as the CEO, Paul Horne took the company to a valuation of $117.30M. 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 Horne’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. Check out our latest analysis for Legacy Reserves
What has LGCY’s performance been like?
Earnings is a powerful indication of LGCY’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Horne’s performance in the past year. Most recently, LGCY released negative earnings of -$152.9M . But this is an improvement on prior year’s loss of -$313.6M, which may signal a turnaround since LGCY has been loss-making for the past five years, on average, with an EPS of -$2.1. Since earnings are heading towards the right direction, CEO pay should represent Horne’s hard work. In the same year, Horne’s total compensation increased by 70.38% to $3,553,552. Moreover, Horne’s pay is also made up of 6.43% non-cash elements, which means that variabilities in LGCY’s share price can affect the actual level of what the CEO actually receives.
Is LGCY overpaying the CEO?
Though no standard benchmark exists, since remuneration should account for specific factors of the company and market, we can gauge a high-level benchmark to see if LGCY deviates substantially from its peers. This outcome can help direct shareholders to ask the right question about Horne’s incentive alignment. Typically, a US small-cap has a value of $1B, creates earnings of $96M, and pays its CEO circa $2.7M per year. Typically I would use earnings and market cap to account for variations in performance, however, LGCY’s negative earnings lower the effectiveness of this method. Looking at the range of compensation for small-cap executives, it seems like Horne’s pay exceeds its peer group.
What this means for you:
Are you a shareholder? LGCY 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. To find out more about LGCY’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? Board members are the voice of shareholders. Although CEO pay doesn’t necessarily make a big dent in your investment thesis in LGCY, 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. To research more about these fundamentals, I recommend you check out our simple infographic report on LGCY’s financial metrics.
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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.