The Canadian large cap companies in the S&P/TSX 60 index faced some headwinds in 2018 with financial results generally weaker than in 2017. Shareholder returns were also negative.
The year-end scorecard in Figure 1 shows the trend of financial and market-based performance in 2018 compared to 2017. Income statement (top-line and bottom-line) and balance sheet measures generally performed worse in 2018, weighed down by a major fourth-quarter slowdown in the Canadian economy. The bright spot was that the cash flow results improved slightly. The modest financial performance in 2018 along with lower expectations for 2019 (as evidenced by a lower price/earnings ratio) contributed to a negative total shareholder return in 2018.
Figure 1. 2018 year-end financial scorecard for the S&P/TSX 60 Index
Results were mixed when we compared actual results to consensus investment analysts’ expectations this time last year. Important metrics like revenue, EBIT growth and ROE surpassed dampened 2018 expectations, but key measures like EPS and cash-flow growth fell short of expectations.
How these financial results translate into bonus payouts will depend on the measures each company uses in its annual incentive plan. When we analyzed CEO bonus payouts for the S&P/TSX 60 companies for 2017, the median payout was 119% of target. Weaker performance in 2018 suggests that bonuses may trend below last year’s payouts, although investment analysts anticipated this slowdown, and in some cases, actual results exceeded these lower expectations. Long-term incentive plan payouts could be lower for plans based on financial performance, while those that are based on relative TSR performance will be dependent on the composition of the performance share unit (PSU) peer group and the degree of over-performance or under-performance relative to the peers. Next quarter we’ll report on how 2018 incentive plan payouts for S&P/TSX 60 CEOs played out, based on forthcoming proxy disclosures.
Figure 2 shows how investors expect 2019 to compare to 2018. Analysts are clearly expecting continued weakness in top-line growth but improvement for bottom-line growth and cash-flow growth.
Figure 2. 2019 analysts’ expectations for the S&P/TSX 60 Index versus 2018 results
Decelerating 2018 financial results paired with conservative 2019 expectations create a challenging atmosphere for setting realistic 2019 incentive plan goals. Management and boards will have to strike the right balance to set compelling goals in the face of softening expectations (i.e., ensuring that there’s a meaningful risk of little to no payout, but also a viable chance to attain the maximum incentive plan performance levels). Overly conservative goals could lead to perceptions of a lack of rigor and imperil say-on-pay votes, but overly aggressive or unrealistic goals could impair engagement or retention of key talent.
For a review of 2018 results and 2019 expectations for the U.S. S&P 1500, see “Pay-for-performance update for the S&P 1500: Strong financials but negative shareholder returns”, Executive Pay Matters, February 21, 2019.
Ming Young, Christina Le and Sebastién Morrissette are executive compensation consultants based respectively in Willis Towers Watson’s Toronto, Vancouver and Montreal offices. Email firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com.