Our last update revealed CEO bonus payouts trending around target. This blog explores financial expectations for 2017 and first half outcomes, which could point to how incentive plans may be impacted. (For more details of our last analysis, see “Pay-for-performance update for the industrials sector: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.)
Expectations for the industrials sector in 2017, as shown in Figure 1, are ambitious. All metrics, with the exception of cash flow, are expected to increase substantially. Income statement growth is expected to double compared with a lackluster year in 2016. Return on equity is projected to outpace the S&P 1500 once again. Cash flow growth at the median is anticipated to be modest year-over-year.
Figure 1. Analysts’ growth expectations for 2017 in the industrials sector
Figure 2 compares the first six months of the year to the first six months of the same period a year ago. It shows generally positive income statement and market-based measures but negative or flat balance sheet and cash flow metrics. Revenue, EBIT, and EPS growth all appear poised to meet analysts’ expectations. Returns vary from flat (ROE) to down slightly (return on net assets), both of which could benefit if companies deliver higher earnings the rest of the year. In stark contrast, cash flow is down 8%, reflecting negative cash flow growth posted by nearly 60% of companies in the sector. Higher 2017 inventory levels compared with 2016, surely dragged down cash flow results.
Figure 2. First half financial scorecard for the industrials sector
The industrials sector is trending in the right direction using several measures, but it will need to have strong performance in the second half to meet robust analyst expectations. Increased demand and stabilizing commodity prices have driven first half 2017 results. Through the end of the year, higher spending, potentially lower taxes, and a generally positive economic outlook in the U.S. and Europe provide the sector further room to build upon first half results. If so, pay outcomes for the sector could be much more robust for the year. 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.
Paige Patton is a senior executive compensation analyst in Willis Towers Watson’s Detroit office and Alex Ha is a senior executive compensation analyst in Willis Towers Watson’s Chicago office. Email email@example.com, firstname.lastname@example.org or email@example.com.