In business, as in many facets of life, incentives play a large role in
determining subsequent performance. And since the expectations for
future financial performance lie at the heart of expectations investing,
a company’s incentive compensation arrangements should concern us
as investors. While most investors readily acknowledge the significant
interplay between incentive compensation and performance, many
fail to appreciate that a company’s management incentives can pro-
vide important clues about likely upward and downward expectations
revisions.
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Three issues in particular stand out. First, investors assume that as
long as companies offer equity-linked ...