Alan Hyatt took the helm as Severn Bancorp Inc’s (NASDAQ:SVBI) CEO and grew market cap to USD$86.94M 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. I will break down Hyatt’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 Severn Bancorp
What has SVBI performance been like?
Earnings is a powerful indication of SVBI’s ability to invest shareholders’ funds and generate returns. Therefore I will use earnings as a proxy of Hyatt’s performance in the past year. Over the last year SVBI delivered an earnings of $3.7M , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of $13.3M. Given that SVBI has been loss-making in the past, hopefully this decline isn’t a reversion back to historical trends. During times of deteriorating profitability, the company may be incurring a period of reinvestment and growth, or it can be a signal of some headwind. Regardless, CEO compensation should represent the current condition of the business. In the most recent report, Hyatt’s total compensation rose by 8.77% to $490,248. In addition to this, Hyatt’s pay is also made up of 8.32% non-cash elements, which means that variabilities in SVBI’s share price can move the real level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
Though there is no cookie-cutter approach, since compensation should be tailored to the specific company and market, we can estimate a high-level thresold to see if SVBI deviates substantially from its peers. This exercise can help shareholders ask the right question about Hyatt’s incentive alignment. Typically, a US small-cap is worth around $1B, produces earnings of $96M, and pays its CEO circa $2.7M per year. Considering the size of SVBI in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Hyatt is paid in-line with other US CEOs of small-caps, on average. This indicates that Hyatt’s pay is fair.
What this means for you:
Are you a shareholder? In the upcoming year’s AGM, shareholders should think about whether another increase in CEO pay is justified, should the board propose an executive pay raise. Will this raise take Hyatt’s pay beyond the bound of reasonableness, or will it help in retaining the talented executive? Being proactive in governance decisions is a key part to investing, and collectively, investors can make a big difference. To find out more about SVBI’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? In order to determine whether or not you should invest in SVBI, your thesis should be built on fundamentals. Even though CEO pay isn’t technically a key concern, it could serve as an indication as to how board members align incentives and how they think about setting policies. These issues directly impacts how SVBI makes money, and factors impacting your return on investment. To research more about these fundamentals, I recommend you check out our simple infographic report on SVBI’s financial metrics.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned.