Our last update highlighted a slight rebound in the second half of 2016, producing mixed results overall. A deeper dive within the health care sector revealed some considerable differences in financial results among the different industries within the sector - see “Fourth-quarter pay-for-performance update for the health care sector: Uncertainty looms,” Executive Pay Matters, March 27, 2017.
To follow on, this post focuses specifically on the health care equipment and supplies industry. It 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 health care equipment and supplies industry were substantially higher than all the sectors we reviewed. Approximately 80% of CEOs received bonuses between 100% and 150% of target, resulting in a median payout of 126% of target. The pattern continued in 2016 as evidenced by the elevated bonuses shown in Figure 1. The median payout (129% of target) remained similar to 2015, with 35% of the CEOs in the sample enjoying payouts ranging from 130% to 150% of target.
Figure 1. Distribution of CEO bonus payouts in the health care equipment and supplies industry
Consistent with 2015, the majority of 2016 bonus payouts fall above the target range: 70% of the sample above the target range (more than 110% of target) versus only 5% being below the target range (90% of target or less). A closer examination reveals steady bonuses across the industry, as most companies reported similar payouts in 2016 compared to 2015:
- More than half (55%) stayed in the same payout range
- Almost a third made a moderate change: moving up or down by one or two ranges
- Only 10% experienced a significant change: moving up or down by three or more ranges
We also reviewed the results of LTIP payouts for performance awards ending in 2016 (generally launched in 2014). We compare the award payout to the award target in two ways: the LTIP payout without the impact the change in stock price has on the share-based plans, and the LTIP payout with the change in the stock price. Figure 2 shows the distribution of these outcomes.
When payouts are examined without the change in stock price, we notice 23% of the sample is at either extreme (i.e., less than 50% of target or more than 150% of target), and almost 30% of the sample paid out near target. Considering the impact of stock performance over time, we tend to see an increase in target-or-better scenarios as target-or-better performance generally combines with strong stock performance to make the payouts more valuable. Including stock performance, more than 60% of plans paid out above the target range (more than 110% of target), including almost one-third of plans that paid out at 170% or more of target.
Figure 2. LTIP payouts ending in 2016 as a percent of target
The high concentration of LTIP payouts at the extremes reveals the complexities of setting goals over a multi-year time horizon. Ignoring the impact of stock performance, we see almost 23% of the LTIP awards in the top or bottom bucket compared to only 10% of the bonus awards. Perhaps this target-setting challenge is why some companies simply opt to use relative total shareholder return in their long-term incentives. But there may be another way.
Increasingly, companies are considering how predictive analytics can be used to help calibrate annual and long-term incentive plan goals. 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.
Looking ahead in the health care equipment and supplies industry, continued steady growth in the domestic market is expected as a result of an aging population, increased life expectancy and the potential for improvements to the regulatory process. However, the global market presents a more mixed outlook: while there is sustainable, and even growing, demand in the global market, the potential for tougher regulation in the EU, as well as global competition from foreign companies, may present challenges for the US companies. Stay tuned for our next sector update which will examine mid-year performance and provide a preliminary sense of whether 2017 will continue the upward trend.
For a more detailed look at the broader biopharma industry (consisting of companies in the biotechnology, pharmaceutical and life sciences tools and services industries) see "Pay-for-performance update for the biopharma industry: pay for 2016 performance," Executive Pay Matters, June 27, 2017.
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.
Mitchell Bardolf is a senior executive compensation consultant in Willis Towers Watson’s Arlington office, and Min Ko is an executive compensation consultant in the company’s Detroit office. Email firstname.lastname@example.org