Glenn Watchorn is the CEO of Terra Firma Capital Corporation (CVE:TII), which has recently grown to a market capitalization of CA$40.78m. Understanding how CEOs are incentivised to run and grow their company is an important aspect of investing in a stock. This is because, if incentives are aligned, more value is created for shareholders which directly impacts your returns as an investor. I will break down Watchorn’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.
What has TII’s performance been like?
Performance can be measured based on factors such as earnings and total shareholder return (TSR). I believe earnings is a cleaner proxy, since many factors can impact share price, and therefore, TSR. Recently, TII released an earnings of CA$2.30m , which is an increase of 29.24% from its last year’s earnings of CA$1.78m. This is a positive indication that TII has strived to maintain a good track record of profitability in the face of any headwinds. Given earnings are moving the right way, CEO pay should be reflective of Watchorn’s valued-adding activities. Over the same period Watchorn’s total remuneration dropped by -19.34%, to CA$823.92k. Moreover, Watchorn’s pay is also made up of 53.95% non-cash elements, which means that variabilities in TII’s share price can impact the true level of what the CEO actually collects at the end of the year.
What’s a reasonable CEO compensation?
Despite the fact that no standard benchmark exists, since remuneration should be tailored to the specific company and market, we can evaluate a high-level benchmark to see if TII deviates substantially from its peers. This exercise helps investors ask the right question about Watchorn’s incentive alignment. Typically, a Canadian small-cap has a value of $345M, produces earnings of $24M, and remunerates its CEO circa $770,000 per year. Allowing for TII’s size and performance, in terms of market cap and earnings, it seems that Watchorn is paid higher than other Canadian CEOs of profitable small-caps. Although this is simply a basic calculation, shareholders should be cognizant of this expense.
What this means for you:
In order to determine whether or not you should invest in TII, 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 TII makes money, and factors impacting your return on investment. 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 TII’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 TII? 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 email@example.com.