Our last update revealed restaurant CEOs received below-target bonus payouts for 2016 while long-term awards generally performed above target for periods ending in 2016. This analysis focuses on 2017 expectations based on first-half financial performance, which may provide a preliminary indication on how 2018 incentive payouts for 2017 performance could be impacted. (For more details of our last analysis, see “Pay-for-performance update for the restaurant industry: pay for fiscal 2017 performance,” Executive Pay Matters, August 2, 2017.)
2017 revenue growth estimates are tracking in line with 2016 at 4%, as shown in Figure 1. Earnings growth is expected to decline in 2017. Meanwhile cash flow and return on equity are expected to increase relative to 2016 driven by strong expectations for the second half of 2017.
Figure 1. Analysts’ growth expectations for 2017 in the restaurant industry
Figure 2 compares the first six months of the year to the first six months of the same period a year ago. The scorecard shows mixed results across the income statement, with balance sheet and cash flow measures on par with prior period performance. EPS growth shows a marked decline following double digit growth in 2016. Meanwhile TSR results were strong in the first half.
Figure 2. First half financial scorecard for the restaurant industry
With higher than expected GDP results just announced, historically low unemployment levels and signs that the economy continues to improve, the restaurant industry may begin to benefit from an increase in consumer spending. But it’s a double-edged sword, as the improving economy contributes to rising labor costs, which in turn, pressures margins and could reduce earnings growth. 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 plan goals using predictive analytics, namely with our proprietary predictive performance model (PPM). To learn more about our model, follow the link here.
Kate King is an executive compensation consultant in Willis Towers Watson’s Seattle office and a member of the company’s retail and restaurant industry consulting teams. Chris Marques is an executive compensation consultant in Willis Towers Watson’s Detroit office. Email email@example.com, firstname.lastname@example.org or email@example.com.