Our last update revealed increased CEO bonuses and robust rewards for long-term performance plans in 2016. In this blog we highlight expectations for 2017 and how the first half 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 materials sector: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.)
The expectations for the sector in 2017, as shown in Figure 1, are very ambitious. Revenue is not only expected to rebound, but to grow at a sharp 6%. This follows a revenue decline in each of the last two years. The strong expectations continue with earnings per share growth, which is expected to more than double. Cash flow is expected to turnaround, and returns on equity are expected to climb.
Figure 1. Analysts’ growth expectations for 2017 in the materials sector
Figure 2 shows the sector is on track to generate the improved results expected by analysts. It compares the first six months of the year to the first six months of the same period a year ago. Overall, the scorecard shows an improving income statement, with balance sheet and market-based measures generally holding steady. Revenue, EBIT and EPS growth appear to be on pace to meet expectations for 2017. The elephant in the room is first half cash flow. Not only does the median indicate a 20% decline, but 65% of the sector reported lower cash flow than the same period a year ago. Hopefully, in the latter half of the year, the improved earnings will boost the cash flow statement.
Figure 2. First half financial scorecard for the materials sector
Overall, the materials sector is off to a strong start in 2017. Performance in the first six months was driven by stabilizing commodity prices and the global reduction of fiscal restraints, which could bring about lower taxes, higher spending, or both. With the continued demand for raw materials from developing countries and a generally positive economic outlook in the U.S. and Europe, the sector has the opportunity to continue the trend through the end of the year. If so, we could see another increase in pay outcomes for the sector. 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 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.
Chris Kozlowski is an executive compensation consultant in Willis Towers Watson’s Pittsburgh office, and John Prondzinski is an executive compensation analyst in the company’s Minneapolis office. Email firstname.lastname@example.org, email@example.com or firstname.lastname@example.org.