Revenue Growth Metric in Short-Term Incentive Plan
On p. 17 of its proxy research report, ISS writes about our short-term incentive program:
Most notably, while annual incentives were based on objective financial metrics, the company continues to set certain target goals
below prior actual achievement levels
We believe this analysis does not accurately characterize both the metrics within our short-term
incentive plan and the Committees process for setting performance targets/goals for those metrics. The metrics in our short-term incentive program OPBT margin and year-over-year revenue growth directly reflect our strategic
priorities and also are strongly correlated with shareholder value creation.
Importantly, because the revenue metric requires year-over-year growth for
any payout, this means that if revenue declines in any quarter YoY within the performance period, that portion (50%) of the short-term incentive opportunity will have zero payout.
ISS analysis of our short-term incentive focuses primarily on the operating profit before tax (OPBT) margin metric and seems to significantly discount
the implied rigor of the revenue growth metric and targets, and the difficulty of achieving significant payout levels in any given quarter.
To that end,
our YoY revenue growth in Q3 and Q4 FY 2023 was negative, as noted on p. 57 of our 2024 proxy statement. Accordingly, there was zero payout for the revenue growth metric portion of the short-term incentive in those two quarters. Similarly, in Q1
FY24, our revenue declined year-over-year and the revenue growth metric will pay out at zero for the quarter. Furthermore, per our publicly provided guidance to the investment community, we expect that revenue will decrease in Q2 FY 2024 versus the
prior year.3
Revenue growth in FY 2022 rewarded record achievement, and despite declining revenue
and expectations of a more challenging operating environment in FY24, we held these targets constant.
Maximum Payout Opportunities in Short-Term
Incentive Plan
On p. 17 of its proxy research report, ISS writes that our short-term incentive program:
allow[s] for a high maximum payout opportunity which significantly exceeds market norms.
The Committee believes that the maximum payout opportunities are extremely difficult to achieve. In fact, they go beyond the expectations of our long-term
financial model as communicated to the investment community at our investor day in 2022. For example, under our long-term financial model we are targeting OPBT margin in the range of 42-50%. In order to
achieve the maximum payout under the OPBT metric in our short-term incentive, we would need to meet or exceed that 50% level.
The Committee believes this
represents a rigorous target given a) ADI already has industry-leading margins and is, naturally, under competitive pressure aimed to compress those margins, and b) the broader operating environment is pressuring margin amid a cyclical downturn.
3 |
Reflects previously issued guidance on February 21, 2024 for ADIs second quarter of FY24. ADI is not
hereby affirming or updating previously issued guidance. |
Analog Devices, Inc. | One Analog Way | Wilmington, MA 01887 | U.S.A | Tel: 781.935.5565