Leading Zecotek Photonics Inc (TSXV:ZMS) as the CEO, A. Zerrouk took the company to a valuation of CADCA$35.04M. 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 Zerrouk’s pay and compare this to the company’s performance over the same period, as well as measure it against other Canadian CEOs leading companies of similar size and profitability. See our latest analysis for Zecotek Photonics
Did Zerrouk create value?
Profitability of a company is a strong indication of ZMS’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Zerrouk’s performance. Over the last year ZMS released negative earnings of -CA$3.4M . However, this is an improvement on prior year’s loss of -CA$5.2M, which may signal a turnaround since ZMS has been loss-making for the past five years, on average, with an EPS of -CA$0.07. Since earnings are heading towards the right direction, CEO pay should mirror Zerrouk’s hard work. In the same year, Zerrouk’s total compensation fell by -10.01%, to CA$690,927. Furthermore, Zerrouk’s pay is also made up of 34.63% non-cash elements, which means that fluxes in ZMS’s share price can impact the real level of what the CEO actually collects at the end of the year.
Is ZMS overpaying the CEO?
While there is no cookie-cutter approach, as compensation should account for specific factors of the company and market, we can evaluate a high-level benchmark to see if ZMS is an outlier. This exercise can help direct shareholders to ask the right question about Zerrouk’s incentive alignment. On average, a Canadian small-cap has a value of $345M, creates earnings of $24M, and pays its CEO circa $770,000 per annum. Usually I would look at market cap and earnings as a proxy for performance, however, ZMS’s negative earnings lower the effectiveness of this method. Given the range of pay for small-cap executives, it seems like Zerrouk is being paid within the bounds of reasonableness. Overall, though ZMS is loss-making, it seems like the CEO’s pay is sound.
What this means for you:
Are you a shareholder? You can breathe easy knowing that shareholder funds aren’t being used to overpay ZMS’s CEO. However, on the flipside, you should ask whether Zerrouk is appropriately remunerated on the basis of retention. Its important for shareholders to be active in voting governance decisions, as board members are only representatives of investors’ voices. To find out more about ZMS’s governance, look through our infographic report of the company’s board and management.
Are you a potential investor? Although remuneration can be a useful gauge of whether Zerrouk’s incentives are well-aligned with ZMS’s shareholders, it is certainly not sufficient to base your investment decision solely on this factor. Whether the company is fundamentally strong depends on ZMS’s financial health and its future outlook. To research more about these fundamentals, I recommend you check out our simple infographic report on ZMS’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.