Biotech Values

[DewDiligence]

[OT/Compensation]—I just ran into a case so egregious I had to listen to the CC passage twice to be sure I heard it right.

Caterpillar (CAT) has had declining sales for four consecutive years and is forecasting a fifth consecutive down year in 2017. Making matters worse, CAT shelled out $8.6B for an all-cash buyout of Bucyrus at the peak of the commodities bull market (#msg-56696672), causing significant deterioration of CAT’s balance sheet.

To ameliorate the damage, CAT has been cutting costs relentlessly (i.e. layoff off anyone they could), so that the decremental margin* during 2013-2016 has been in the 20s, which is smaller [i.e. better] than in previous cyclical downturns.

In guiding for 2017, however, CAT said its decremental margin will rise to about 30%. When an analyst asked how the decremental margin could be so high after so much cost-cutting, the answer was that...

...incentive compensation for senior executives will be substantially higher in 2017! Why so, an analyst asked. Because CAT's financial results have been so bad for so long that senior executives hadn't received enough incentive compensation to stay incentivized.

*Percent reduction in operating profit for each $1 reduction in sales.