Our last update for the consumer staples sector revealed above-target CEO bonuses and robust rewards for long-term performance plans ending in 2016. This blog highlights expectations for 2017 and how the first half of the year has fared, which could point to how incentive plans are impacted. (For more details of our last analysis, see “Pay-for-performance update for the consumer staples sector: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.)
Expectations for the sector in 2017, as shown in Figure 1, generally reveal lower growth than in 2016. Revenue growth is expected to remain flat at a tepid 2%, consistent with the last two years. Muted expectations are also reflected in earnings per share growth, which is expected to decrease from 17% to 7%. Following modest growth in 2016, cash-flow growth is expected to turn negative in 2017. Perhaps relatedly, returns on equity are expected to climb, driven in part by the sector’s increasing need and/or preference for debt over equity financing, which adds incremental risk to the equation.
Figure 1. Analysts’ growth expectations for 2017 in the consumer staples sector
Figure 2 shows the financial scorecard, comparing the first six months of 2017 with the first six months of 2016. The scorecard shows mixed results in the income statement, with balance sheet and market-based measures generally holding steady or declining slightly. Looking back to Figure 1, we see that revenue, cash flow growth and ROE are in line with analysts’ expectations for 2017. EPS growth has declined and currently lags expectations.
Figure 2. First half financial scorecard for the consumer staples sector
Even with higher than expected GDP results just announced, historically low unemployment levels and signs that the economy continues to improve, consumer staples companies may not be able to quickly benefit from the potential consumer spending increase. If financial results do not improve from current levels, bonuses for 2017 performance could be challenged to hit target. For a look at the 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 2018 incentives. In our experience, goals tend to flex in strong and weak years in order to manage the probability of achieving target. Willis Towers Watson helps 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.
Michael Biggane is an executive compensation consultant in Willis Towers Watson’s Cincinnati office, and Felipe Dieguez is an executive compensation analyst in the company’s Los Angeles office. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.