Our last quarterly pay-for-performance update for the S&P 1500 focused on the pay implications of 2016 performance for annual and long-term incentive awards that concluded during the year. It showed annual bonuses trended around target. Long-term incentive awards, which reflected above-target performance, were further elevated by robust stock prices over the last three years. (For more details of our last analysis, see “Pay-for-performance update for the S&P 1500: 2016 pay outcomes,” Executive Pay Matters, June 27, 2017.)
At the halfway point, investment analysts expect 2017 to show improved performance compared with 2016 results (Figure 1). Contributing factors include optimism regarding tax reform, improved GDP reports and potential productivity improvements. However, the economic picture isn’t completely positive, and some investors are concerned about the potential for a slowing economy due to lower consumer spending, legislative uncertainty and increasing interest rates.
Figure 1. S&P 1500 analysts’ growth expectations for 2017
We looked at these results by market capitalization. While they don’t tend to vary much, we did note that growth estimates are slightly higher for mid-cap and small-cap companies. (See the links at the end of this blog for analysis by economic sector.)
Figure 2 shows performance through the first half of the year compared with last year’s results for the first six months. Financial results have improved across the board for the first half of 2017 compared with 2016.
- Revenue growth has doubled, driven by improvements in the energy, healthcare and utilities sectors
- Earnings per share was also considerably higher due to increased revenue and margins
- Total shareholder return (TSR) performance for the first half of 2017 has continued the strong finish in 2016, proving significantly higher than the first half of 2016.
Figure 2. S&P 1500 year-to-date financial scorecard
So at the halfway point, the performance trend is strong — ahead of last year. Incentive plan participants may be forming expectations about robust payouts based on the trend. But performance trails the investment analysts’ expectations slightly in a few key metrics. Whether companies are able to sustain and extend the strong track record into the second half of the year will have important implications for performance-based pay plans that conclude in 2017.
Looking ahead, the strong performance trend also has implications for 2018 incentives. In our experience, goals tend to flex in strong and weak years in order to manage the probability of achieving target. The strengthening economy suggests incentive plan goals in 2018 may be on the rise. Toward that end Willis Towers Watson has been helping companies calibrate incentive plan goals using predictive analytics, namely with our proprietary predictive performance model (PPM). To learn more about our model, follow the link here.
For a look at how the first half of 2017 is shaping up for the various economic sectors, click on the links below.
Ryan Lucki is an executive compensation consultant in Willis Towers Watson’s Pittsburgh office. Paige Patton is a senior executive compensation analyst in Willis Towers Watson’s Detroit office. Steve Kline, CFA, is a director in the Pittsburgh office who leads Willis Towers Watson’s efforts to develop innovative approaches to pay-for-performance measurement and analysis. Email firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com.