The Advisors' Blog

– Broc Romanek

Here is a somewhat-dated research report from Credit Suisse, which appears to favor companies that set earnings guidance (ie. external targets) slightly below incentive plan objectives (ie. internal targets) to avoid negative earnings surprises. The report focuses on the big food manufacturing companies and slots them into one of three categories:

– What you see is what you get (incentive targets near mid-point of the guidance)

– Aggressive guiders (incentive targets below earnings guidance)

– Conservative guiders (incentive targets below the mid-point of the guidance)

Most companies were categorized as “what you see is what you get.” I think the report provides some ‘food for thought’ when setting incentive plan targets:

– Earnings guidance and incentive targets are being evaluated by investors as a way of assessing the reasonableness of the incentive plan targets

– It does not look good if incentive targets are far below earnings guidance, as it suggests the incentive plans are rigged for a payout

– Similarly, it does not seem reasonable to have incentive plan targets far above earnings guidance, as it appears you are sandbagging what you’re telling shareholders that you can achieve for the year