Accounting-Based Incentive

When you hear "incentive," think "compensation."

According to the National Association of Shmoop Accounting Research, D.C. division, 147% of company action is determined by the manner in which its C-level officers are paid. So accounting-based incentive is actually a really important determiner in the evaluation of the prospects of a company. Executives get paid in both cash and equity, and the size of those payments is often determined by metrics that need accounting magic to be applied to them to determine whether or not the executive really did grow EBITDA 18%, and thus vest into her 300,000 options.

Why the difficulty? EBITDA is not a tightly-defined GAAP term. It's largely made up by accountants and creative application of metrics can move the calculation of EBITDA up or down a whole lot. So if you're an accountant at a corporation and the CEO suddenly becomes very friendly with you around bonus calculation time, accept her hot cocoa with great cynicism.