Yahoo Finance Is Lumentum Holdings Inc’s (NASDAQ:LITE) CEO Pay Justified?
Leading Lumentum Holdings Inc (NASDAQ:LITE) as the CEO, Alan Lowe took the company to a valuation of US$3.74b. Recognizing whether CEO incentives are aligned with shareholders is a crucial part of investing. 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 Lowe’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 Lumentum Holdings
What has been the trend in LITE’s earnings?
Profitability of a company is a strong indication of LITE’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Lowe’s performance. In the past year, LITE produced a profit of US$241.50m , moving LITE from negative territory of -US$102.64m in the prior year to profitability. Though, the variability in earnings over the last few years makes us less confidence in forecasting future outcome based on past data. Given earnings are moving the right way, CEO pay should represent Lowe’s valued-adding activities. Over the same period Lowe’s total remuneration increased by 15.98% to US$5.92m. In addition to this, Lowe’s pay is also made up of 75.35% non-cash elements, which means that fluxes in LITE’s share price can affect the real level of what the CEO actually takes home at the end of the day.
What’s a reasonable CEO compensation?
Though one size does not fit all, since remuneration should account for specific factors of the company and market, we can fashion a high-level thresold to see if LITE deviates substantially from its peers. This exercise can help shareholders ask the right question about Lowe’s incentive alignment. Typically, a US mid-cap has a value of $5B, generates earnings of $290M and pays its CEO circa $5.3M per annum. Based on the size of LITE in terms of market cap, as well as its performance, using earnings as a proxy, it appears that Lowe is remunerated above other US CEOs of profitable mid-caps. Although this is simply a basic calculation, investors should be aware of this expense.
What this means for you:
The next CEO pay bump should be questioned by shareholders at AGM voting. Given that Lowe’s pay is already above the bracket of other CEOs of similar companies, what justifies a further increase? Although CEO pay is not the be all and end all, it serves as a signal as to whether the board’s and management’s incentives are aligned with the rest of the shareholders. 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 LITE’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 LITE? 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 editorial-team@simplywallst.com.
