Our last update highlighted a strong earnings growth trend for companies in the consumer staples sector in 2016. For a more detailed analysis of the sector’s 2016 financial performance, see “Fourth-quarter pay-for-performance update for the consumer staples sector: What next?” Executive Pay Matters, March 27, 2017. This quarter our blog explores how the 2016 financial results affected annual incentives for 2016 and long-term incentive plans (LTIP) that culminated in 2016.
A year ago, the bonus payouts for the consumer staples sector aligned with the broader S&P 1500, with a median payout above target (104% of target) and the largest percentage of payouts falling in the 100% - 150% range. Improved results in 2016 elevated bonuses, as shown in Figure 1. Not only did the median payout improve to 113% of target (while the median among the S&P 1500 was 109%), but nearly a quarter of the CEOs in the sample enjoyed payouts between 130% and 150%. We believe this correlates with the observed higher than expected earnings growth in the industry, and the prevalence of metrics like operating profit and earnings per share (EPS) in annual incentive plans.
Figure 1. Distribution of CEO bonus payouts in the consumer staples sector
The distribution of 2016 bonus payouts reveals a modest increase in above-target payouts: 54% of the sample were above the target range (more than 110% of target) with just 24% being below the target range (90% of target or less). The biggest swing was in companies making payouts in the 130%-150% of target bucket.
A closer examination reveals even more change, as most companies changed payout buckets in 2016:
- Only 28% stayed in the same payout range
- Almost half (47%) moved moderately up or down by one or two ranges25% realized a significant change: moving up or down by three or more ranges
We also reviewed the results of long-term incentive plan (LTIP) payouts for performance awards ending in 2016 (generally launched in 2014). We compared the payout value to the target value in two ways: the LTIP payout with and without the impact the change in stock price has on values. Figure 2 shows the distribution of these outcomes.
When payouts are examined without accounting for the appreciation or depreciation of stock price, 25% of the sample is in the target range (90 to 110% of target). The majority of companies (55%) paid above the target range (more than 110% of target) whereas only 20% paid below the target range (90% of target or less). Unsurprisingly when we consider the impact of stock price, the target-or-better scenarios tend to become more valuable, and the below-target scenarios often become less valuable. Including stock performance, 60% of plans paid out above the target range, compared to 55% above target when stock gains are excluded. We also see more plans (30%) in the top bucket (more than 170% of target) which reflects significant share price appreciation combined with high levels of vesting.
Figure 2. LTIP payouts ending in 2016 as a percent of target
The concentration of LTIP payouts above target is likely due to improved performance results over the last few years, with above-target results for annual plans cascading into above-target results under long-term plans. Over the last three years the average bonus plan payout has been 108% of target; we observe 157% average payout under long-term incentive plans when the impact of stock price change is taken into account.
Increasingly, companies are considering how predictive analytics can be used to help calibrate annual and long-term incentive plan goals, particularly as investors and proxy advisors increase their scrutiny on the processes in light of above target payouts. In response to market demand, Willis Towers Watson has developed a proprietary approach to simulate future financial and stock performance to estimate the probabilities of various degrees of goal achievement. This modeling helps companies calibrate incentive plan goals and ranges. To learn more about our predictive performance model (PPM), follow the link here.
The consumer staples sector still faces headwinds in 2017: protectionist trade policies and wage pressures as the economy nears full employment levels represent challenges. However, investors are seeing signs of tailwinds as well: consumer confidence is on the rise, and retailers and consumer goods companies are focused on creating increased perceived value for, and brand loyalty among, customers. Stay tuned for our next sector update which will focus on mid-year performance and provide a preliminary sense of whether 2017 will hold steady to 2016 levels. For a look at 2016 pay outcomes for CEOs in the broader S&P 1500, see “Pay-for-performance update for the S&P 1500: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.
Michael Biggane is an executive compensation consultant in Willis Towers Watson’s Cincinnati office, and Felipe Dieguez is a senior executive compensation analyst in Willis Towers Watson’s Los Angeles office. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.