Operating Cash Flow growth is a meaningful metric. We believe it should be factored into executive compensation models.
- Operating Cash Flow matters. Public companies factor annual Revenue growth and EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), or “Adjusted” EBITDA growth into executive compensation plans. We recommend adding Operating Cash Flow (“OCF”) growth to the mix.
- More than one approach to measuring OCF performance. Companies experience depressed OCF levels in periods of investment. Therefore, we would not be opposed to compensation committees evaluating Operating Cash Flow over a trailing two year period to normalize for short-term investment periods. For example, comparing XYZ Corporation’s OCF in the combined 2020 and 2019 period to the OCF sum in the years 2019 and 2018 (see table below).
- OCF normalizes for aggressive accounting. We believe Operating Cash Flow has value as a compensation metric, particularly in cases where companies are aggressive in their approach to “Adjusted” EBITDA add-backs.