Our last update for the biopharma industry revealed increased CEO bonus payouts and robust rewards for long-term performance plans in 2016. In this blog, we highlight expectations for 2017 and first half performance, which could point to how incentive plans may be impacted. (For more details of our last analysis, see “Pay-for-performance update for the biopharma sector: pay for 2016 performance,” Executive Pay Matters, June 27, 2016.)
Expectations for the industry in 2017 are generally mixed, as shown in Figure 1. Declining growth rates are expected for revenue and other earnings measures, while expectations are more optimistic for cash flow and return on equity (ROE). It will be critical for companies to consider alternatives to maximize efficiencies in order to meet the heightened expectations for cash flow and ROE.
Figure 1. Analysts’ growth expectations for 2017 in the biopharma industry
Figure 2 compares the first six months of 2017 to the first six months of 2016. Although performance at the halfway mark is trending relatively flat or on a slight decline for most of the measures, the industry seems to be on track to meet year-end expectations. What’s interesting is that despite some expected slippage in performance in 2017, valuation ratios have climbed above their 2016 levels to drive compelling shareholder returns. This would seem to suggest that it is critical for companies to deliver against these investor expectations.
Figure 2. First half financial scorecard for the biopharma industry
For the biopharma industry, 2017 is proving to be a year of uncertainty. Margins are being squeezed, and companies will have to consider ways to improve business and operating models to gain efficiencies that offset rising cost pressures in order to meet investor expectations and maximize returns. For a look at 2017 expectations and first six month results in the broader S&P 1500, see “Pay-for-performance update for the S&P 1500: A strong first half”, Executive Pay Matters, October 5, 2017.
Looking ahead, current year performance also has implications for setting performance targets for 2018 incentives. In our experience, performance goals tend to flex in strong and weak years in order to manage the probability of achieving target. Willis Towers Watson has been helping companies calibrate incentive plans goals using predictive analytics, namely with our proprietary predictive performance model (PPM). To learn more about our model, follow the link here.
Mitchell Bardolf is a senior executive compensation consultant in Willis Towers Watson’s Arlington office. Jang Han is a member of Willis Towers Watson’s Executive Compensation Resources unit in Arlington, Virginia. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.