What a difference a quarter makes! Our last pay-for-performance update for the S&P 1500 was unsettling. Year-to-date results were down versus the prior year and below investment analysts’ consensus expectations, and there was talk of an earnings recession. (For more details of our last analysis, see “Pay-for-performance update for the S&P 1500: The score at halftime,” Executive Pay Matters, September 21, 2016.)
In contrast, third-quarter results have been the best of the last four quarters. As a result, financial results for 2016 returned to positive territory. Even so, revenue and earnings growth have been relatively modest overall.
Something else happened, of course. Voters put the same party in charge of the White House and congress, setting the prospect for swift, pro-business change. At least that’s how the stock market is sizing up the election. Clearly, the double-digit shareholder returns in 2016 to date are more a reflection of better prospects for 2017 than a ringing endorsement of the low-single-digit-growth results this year. In November, the Dow Jones average, S&P 500 and the NASDAQ composite all reached record highs on the same day, which hasn’t happened since 1999, prior to the bursting of the tech bubble. In particular, returns among the small caps have taken off, as they are perceived to have better growth prospects given the potential backlash against globalization.
Earlier this year, we reported that bonus payouts for 2015 performance declined but still trended slightly above target. (For more details, see “Pay-for-performance update for the S&P 1500: 2015 pay outcomes,” Executive Pay Matters, July 12, 2016.). The strength of the fourth quarter could be a key determinant of how bonuses for 2016 wind up. A recent poll of 260 corporate executives and compensation professionals participating in our 2017 proxy season preview webcast suggests that the bonuses for 2016 will be mixed, with 36% anticipating materially above-target bonuses, another 35% anticipating materially below-target bonuses and the remainder (29%) expecting bonuses around target. (To listen to a recording of our recent webcast, click here.)
To read our new Executive Compensation Bulletin reviewing the S&P 1500’s year-to-date performance and the potential implications for 2016 incentive payouts and 2017 goals, click on DOWNLOAD PDF above or below.
Ryan Lucki is an executive compensation consultant in Willis Towers Watson’s Pittsburgh office. Steve Kline, CFA, is a director in Willis Towers Watson’s Pittsburgh office who leads the firm’s efforts to develop innovative approaches to pay-for-performance measurement and analysis. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.