Our last update about the health care equipment and supplies industry revealed continued trends of strong CEO bonuses and robust payouts 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 may be impacted. (For more details of our last analysis, see “Pay-for-performance update for the health care equipment and supplies industry: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.)
The expectations for the industry in 2017, as shown in Figure 1, reveal slower expansion, reinforcing the difficulty of maintaining the high-growth trajectory experienced recently. Revenue, earnings measures, and cash flow are all expected to grow at a slower rate. Return on equity is expected to improve moderately.
Figure 1. Analysts’ growth expectations for 2017 in the health care equipment and supplies industry
Figure 2 shows that the industry is largely on track to meet analysts’ lower expectations for 2017. The chart compares the first six months of the year to the first six months of the same period a year ago. Growth clearly has slowed in the first half of 2017 compared to the first half of 2016. Meanwhile EPS growth is exceptionally high. It would appear that this industry is deploying its rather significant cash flows generated in 2016 to buy back shares – and at a pace unmatched by other sectors, producing exceptional returns for shareholders in the first half of 2017.
Figure 2. First half financial scorecard for the health care equipment/supplies industry
Overall, the health care equipment and supplies industry has an uphill battle for the remainder of 2017. Performance in the first six months may have been influenced by the uncertainty related to the future of the Affordable Care Act (“ACA”) including the potential financial burden on the health care provider industry in the event of a complete repeal of the legislation. However, with the potential for improvements to the domestic regulation process, the abolition of certain medical device tax policies, and growing demand in the global market, the industry also may have an opportunity to rebound. 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.
Companies in this industry are faced with challenges to perform and meet shareholder expectations in the face of slowed growth. It will be interesting to watch how incentive plans pay out for 2017 performance. Will bonuses reflect the more moderate performance demonstrated by revenue or EBIT results? Or will they reflect the extraordinary EPS results? While the media publicly flags share buybacks, one would think shareholders will be pleased with their returns. Looking ahead, the central question is whether the industry will deploy sufficient cash investments to propel performance in 2018 and beyond. In our experience, 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, and Min Ko is an executive compensation consultant in the company’s Detroit office. Email email@example.com