Reconciliation of Performance Data for Incentive Purposes to
GAAP Financials
Fred Cook is Chair of Frederic W. Cook & Co., Inc.
For a variety of reasons, most corporations use
performance measures that differ in varying degrees from published
GAAP numbers in their audited financial statements. The variations
may be relatively minor, such as adjusting diluted EPS for
identified unusual items, or major, such as using financial measures
like NOPAT or EBITDA that are not GAAP measures at all.
Compensation committees make bonus decisions at
or shortly after year end using performance data provided by
management. Audited financials are not available at this time, but
the financial data upon which the audits will be performed usually
are available.
It is rare in my experience for a compensation
committee to be provided with a reconciliation of the performance
data it is using for bonus purposes to the GAAP performance results
at the time bonus decisions are made, or even thereafter. Thus, it
is possible the performance results may be strong for bonus purposes
but the GAAP results may be weak, or vice versa. There may be
nothing wrong with this per se. The issue is that the compensation
committee may not know this at the time.
The answer would be for the CFO to provide the
Committee with a written memorandum or statement at the same time
bonus decisions are made reconciling the bonus performance data to
the GAAP financials that will be disclosed later. And if
adjustments are made to the financial results during the audit
process that cause them to differ from those in the reconciliation
statement, the committee should be notified so it can take any
actions it deems appropriate.
|