Our last update revealed increased CEO bonuses and robust rewards for long-term performance plans in 2016 (specifically when considering stock price increases during the period). This blog highlights 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 technology sector: pay for 2016 performance,” Executive Pay Matters, June 27, 2017.)
Investment analysts’ consensus expectations for the sector in 2017, as shown in Figure 1, are very ambitious. Revenue and earnings are expected to trend upward from 2016, leading to an anticipated increase in return on equity (ROE) from 10% to 17% for this sector. Only cash flow is anticipated to remain flat in 2017.
Figure 1. Analysts’ growth expectations for 2017 in the technology sector
Figure 2 shows the sector is largely 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 a much improved income statement, with balance sheet and market-based measures generally holding steady to slightly declining due to cash flow concerns. Total shareholder return has significantly rebounded since a flat 2017, which speaks to the strength in the sector for shareholders during the first half of 2017.
Figure 2. First half financial scorecard for the technology sector
Overall, the technology sector is outperforming most other sectors in 2017. Performance in the first six months was driven by exciting new consumer technology releases, which helped to increase revenue and profits across the sector. The sector could extend this positive trend through the end of the year driven by the continued demand for phones, tablets, and other consumer products; a generally positive economic outlook; and the rise of the consumer confidence index back to pre-economic crisis levels in the U.S. If so, we could see another increase in pay outcomes for the sector. 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.
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.
Phil Abrams is a compensation consultant in Willis Towers Watson’s Boston office, and Alex Ha is a senior executive compensation analyst in Willis Towers Watson’s Chicago office. Email firstname.lastname@example.org, email@example.com, or firstname.lastname@example.org.