While 2015’s financial performance challenges carried over to the first half of 2016, utilities sector companies finished 2016 largely in a stronger position. (For a more detailed analysis of companies’ financial performance last year, see “Fourth-quarter pay-for-performance update for the utilities sector: Growth ahead?” Executive Pay Matters, March 27, 2017.) Our blog this quarter reviews spring proxy statement disclosures to understand the impact of 2016 financial performance on CEO bonus payouts and long-term incentive plans (LTIP) that culminated in 2016.
Although growing revenue remains a challenge for the utilities sector, earnings per share (EPS) performance was stronger in 2016 and beat analysts’ expectations, which contributed to strong, above-target bonus payouts in 2016. The median payout was 130% of target (vs. 132% in 2015), with 78% of the 31 CEOs in our sample earning payouts above the target range (see Figure 1).
While the overall median payout was similar year-over-year, a closer examination reveals that most companies changed payout buckets in 2016:
- Only 23% stayed in the same payout range
- 61% moved moderately up or down by one or two ranges
- 16% moved significantly up or down by three or more ranges
Figure 1. Distribution of CEO bonus payouts in the utilities sector
We also reviewed the results of long-term incentive plan (LTIP) payouts for performance awards ending in 2016 (generally reflecting awards granted 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 almost half (48%) of the sample is at either extreme, including a few with no payouts. But when we consider the impact of stock performance over time, the prevalence at the extremes grows to 71%, as stock performance amplifies (up and down) payouts based on goal achievement. We note that a similar number of plans paid out above the target range (more than 110% of target), whether including or excluding stock performance (53% when included, 48% when excluded). However, the average payout for those above the target range was notably higher when including stock price performance. Excluding stock gains, the average payout was 157% of target for those utilities paying out more than 110% of target. When we include stock price gains, the average payout increases to 202%. We also see more plans in the top bucket (more than 170% 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. 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.
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: 2016 pay outcomes,” Executive Pay Matters, June 27, 2017.
Debra Cohen is a senior executive compensation analyst in Willis Towers Watson’s Montreal office and Morgan Meacham is a compensation consultant in the firm’s Atlanta office. Both are members of the firm’s utility industry compensation practice. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.