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Should You Worry About Meritor Inc’s (NYSE:MTOR) CEO Pay Check?

Leading Meritor Inc (NYSE:MTOR) as the CEO, Jay Craig took the company to a valuation of US$1.87b. 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. Today we will assess Craig’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 Meritor

Did Craig create value?

Profitability of a company is a strong indication of MTOR’s ability to generate returns on shareholders’ funds through corporate activities. In this exercise, I will use profits as a proxy for Craig’s performance. Most recently, MTOR delivered a profit of US$327.0m , which is a rather significant decline from its prior year’s profit (excluding extraordinary items) of US$560.0m. However, MTOR has strived to maintain a good track record of profitability, given its average EPS of US$2.16 over the past couple of years. In the situation of deteriorating profitability, the company may be incurring a period of reinvestment and growth, or it can be an indication of some headwind. Regardless, CEO compensation should represent the current condition of the business. In the latest financial statments, Craig’s total compensation increased by 10.0% to US$6.1m. Moreover, Craig’s pay is also made up of 59.38% non-cash elements, which means that fluctuations in MTOR’s share price can impact the true level of what the CEO actually receives.

NYSE:MTOR Income Statement Export August 24th 18
NYSE:MTOR Income Statement Export August 24th 18

Is MTOR’s CEO overpaid relative to the market?

Though one size does not fit all, since remuneration should be tailored to the specific company and market, we can evaluate a high-level base line to see if MTOR is an outlier. This exercise helps investors ask the right question about Craig’s incentive alignment. Generally, a US small-cap is worth around $1B, produces earnings of $96M, and remunerates its CEO at roughly $2.7M annually. Taking into account the size of MTOR in terms of market cap, as well as its performance, using earnings as a proxy, it seems that Craig is compensated similar to the average US small-cap CEO This could mean Craig is paid a suitable level.

Next Steps:

My conclusion is that Craig is not being overpaid. But your role as a shareholder should not end here. As above, this is a relatively simplistic calculation using high-level benchmarket. Proactive shareholders should question their representatives (i.e. the board of directors) how they think about the CEO’s incentive alignment with shareholders and how they balance this with retention and reward. If you have not done so already, I urge you to complete your research by taking a look at the following:

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  1. Governance: To find out more about MTOR’s governance, look through our infographic report of the company’s board and management.

  2. 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.

  3. Other High-Growth Alternatives: Are there other high-growth stocks you could be holding instead of MTOR? 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.