Not surprisingly for readers of our pay-for-performance blog, 2017 year-end results for the S&P/TSX 60 generally improved from 2016, with significant improvement in key measures including revenue and profit growth. While total shareholder return (TSR) was a solid 11% in 2017, it is significantly lower than the 21% in 2016. This reflects a more modest growth outlook for 2018 driven by higher interest rates, commodity price variability, slowing economic growth and trade uncertainty. In comparison, the U.S. S&P 1500 index enjoyed improving returns of 21% in 2017 versus 13% in 2016.
Figure 1 shows median results for 2017 which highlight continued positive growth across all the financial measures, starting with a big jump in revenue growth. Earnings growth was in double digits, while margins also expanded, contributing to materially improved returns and cash flow results. Despite these financial results, the price/earnings valuation ratio deteriorated noticeably in 2017 which muted shareholder returns for the index.
Figure 1. 2017 year-end financial scorecard for the S&P/TSX 60 Index
A comparison of results with investment analysts’ expectations from a year ago show that actual revenue, EBIT and EPS growth in 2017 were well above expectations. Meanwhile, cash-flow growth was more in line with last year’s expectations. This sets up a promising year for executive bonus payouts as actual performance is likely higher than initial targets. The median CEO bonus paid in 2017 (for 2016 performance) among the S&P/TSX 60 companies was 112% of target and, given that 2017 performance over 2016 was strong, outperforming expectations, it is reasonable to expect that actual bonuses for 2017 will be higher than last year. Of course, this will vary based on industry and actual individual company results.
Long-term incentive plan payouts could be lower for plans that are based on TSR performance relative to peers, while the portion based on financial performance could be higher than the previous cycle.
Our next quarterly blog will cover CEO incentive plan payouts for 2017 based on proxy disclosures.
Figure 2 shows that investment analysts expect continued financial growth through 2018, albeit at a slower pace compared to 2017. The one exception is cash-flow growth which is expected to more than double in 2018. More modest analyst expectations for 2018 and uncertainties around the NAFTA renegotiation may pose some challenges to companies trying to set their 2018 incentive plan goals which may benefit from a more rigorous target-setting approach. Expectations for the S&P 1500 are much more optimistic, with higher projected growth in 2018 on all five financial measures. This is most likely the result of the recent U.S. tax reform (see “What comes after tax cuts?”, Executive Pay Matters, February 22, 2018). It is, however, difficult at this point to predict how companies will adjust their performance targets to account for any positive effects from the tax cuts.
Figure 2. 2018 analysts’ expectations for the S&P/TSX 60 index versus 2017 results
For a review of 2017 results and 2018 expectations for the broader S&P 1500, see “Pay-for-performance update for the S&P 1500: full steam ahead”, Executive Pay Matters, March 27, 2018.
Ming Young, Christina Le and Sebastién Morrissette are executive compensation consultants based respectively in Willis Towers Watson’s Toronto, Vancouver and Montreal offices. Email firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com.