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Ask the Experts: How to Factor Compensation Awards in Global Cash Flow Analysis

Charlie asks:

How are the following compensation items factored as part of the global cash flow analysis:

  • Equity Ownership Plan (EOP) Award
  • Discretionary Cash Award
  • Deferred Contingent Capital Plan (DCCP)

In addition, there is a three-year vesting period on the above that is fluctuating.

Linda says:

I would treat awards differently depending on whether they are one-time or continuing. So I have three questions to get us started.

Does this appear to be recurring?

  1. My first thought is if there is a vesting period for 3 years, where is the borrower in that three year window? 
  2. Since the awards are fluctuating, is there a range for the awards? 
  3. And how much longer are they expected to continue?

What are the awards based on?

Are they based on individual achievement or company profitability? That may help you decide if they are likely to continue.

The conservative approach

Many lenders and analysts would take a conservative approach, Charlie. Before you do, consider how you treat it if you have an executive who gets bonuses based on company performance. Average them? Leave them out? Consider how the company is doing before you decide.

Do it both ways?

Also, I might go one more step and do it both ways, especially if the awards are based on the performance of the company. In the numbers, leave it out. But the write-up mentions that with the awards, which have been consistent for the past three years, the DTI or DSC or margin (whichever you use) would be X. Since the awards are based on the performance of the company, to be conservative, you have left them out of the analysis. 

I know that brief write-ups have a lot of merit. But I like mentioning something like this in the write-up so that if you are not the one doing the analysis next year, that analyst will know your thought process.

In a global analysis, this washes anyway

If you are leaving the awards out of personal income, you would also leave the expense in the company for the awards out, right? With the vesting, you will not be in the same year so it may not wash to zero each year.

More on global analysis?

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