Loop Capital Worries About A Q3 Miss From Kansas City Southern

Loop Capital’s Rick Paterson expressed concern that Kansas City Southern KSU will miss the Q3 expectations when it reported its results on October 18, driven by the company’s incentive compensation expenses.

Paterson maintained a Buy rating on the company, while lowering the price target from $115 to $113.

Incentive Compensation Plans

While public data on Kansas City Southern’s incentive compensation plans is incomplete, the analyst mentioned that there were three primary plans that investors should know about.

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AIP

“The first is the Executive Annual Incentive Plan (AIP). It covers the senior management team (<30 people), is paid annually in cash, and the payouts are based on achieving full year operating ratio targets in the respective year,” Paterson stated.

LTI

The second plan is the Executive Long Term Incentive Plan (LTI), which is a three-year plan instituted annually. However, it covers the same executives as the AIP, with 75 percent of the payout being based on achieving the ROIC targets.

The remaining 25 percent of the payout depends on the achievement of the operating ratio thresholds. The analyst noted that the payouts were in shares, options and restricted stock.

GIC

The third plan is the General Incentive Compensation Plan (GIC), meant for the broader U.S. management team, which might include more than 200 executives, and like the AIP, it is an annual plan, paid in cash on achieving the operating ratio targets.

“We can't calculate the financial impact of the specific plans, but incentive compensation expense from the general plan probably approximates or even exceeds the sum of the two executive ones,” Paterson added.

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