Free Cash Flow and Compensation: A Fashionable Fad or Something More?

As instances of alleged cases of accounting fraud and earnings management have increased in recent years there has been a "discovery" of sorts of free cash flow by investors, analysts and the financial press. Such a development is interesting because certainly free cash flow is not new. It has always been of primary importance to investors for purposes of valuation. References to the metric have grown markedly in recent years and it is now being used in new and varied ways. One such use is in the calculation of incentive compensation. This report provides evidence of the recent increase in interest in free cash flow and surveys its use in incentive compensation agreements. Portions of this report were adapted from the upcoming book, "Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance," by C. Mulford and E. Comiskey, scheduled for publication later this year by John Wiley & Sons