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Article | Executive Pay Matters

Health care equipment and supplies industry pay-for-performance update: dwindling performance puts incentive goal setting to the test

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By Mitchell Bardolf and Min Ko | October 2, 2019

Will more modest growth expectations create challenges for the industry in the second half of 2019, or will favorable long-term trends such as an aging global population prevail? 

Lagging financial results in the health care equipment and supplies industry compared with 2018 and analysts’ expectations for 2019 could signal below-target incentive earnings for fiscal year 2019, driven by recent declining growth, and global and domestic uncertainties.

This quarter’s update highlights 2019 performance trends and expectations in the industry, complementing our last update that focused on the pay implications of 2018 performance. Annual and long-term incentive (LTI) payouts in 2018 hovered above the target range despite financial outcomes falling below expectations. For more details, see “Health care equipment and supplies industry 2018 pay-for-performance update: improved incentive payouts tied to strong performance outcomesExecutive Pay Matters, July 16, 2019).

Figure 1 reviews early 2019 expectations compared with 2018 results. Analysts expected weakened revenue growth and minimal increases to earnings before interest and tax (EBIT), earnings per share (EPS) and return on equity (ROE) relative to 2018 outcomes. Consistent with the broader S&P 1500, analysts anticipated significant cash-flow growth.

Figure 1. Health care equipment and supplies industry analysts’ growth expectations for 2019
Figure 1. Health care equipment and supplies industry analysts’ growth expectations for 2019

Source: S&P's Capital IQ database

The industry is experiencing sluggish growth in the first half of 2019, following improved 2018 income growth, as the across-the-board financial results in Figure 2 show. The only exceptions are a slight increase to return on equity (ROE) and consistent returns on net assets (RONA).

Even so, investors still have positive expectations for the industry, with market-based measures exhibiting strong growth compared to 2018 and exceeding the S&P 1500’s price/earnings ratio by 20 and total shareholder return (TSR) of 18%.

 
  Health care equipment and supplies industry median*  
Measures 1st half 2018 1st half 2019 2019 trend
Income statement      
Revenue growth 11% 6% This is a red arrow pointing down indicating a downward trend
Earnings before interest and taxes (EBIT) growth 10% 4% This is a red arrow pointing down indicating a downward trend
Earnings per share (EPS) growth 18% 1% This is a red arrow pointing down indicating a downward trend
EBIT margin 16% 15% This is a red arrow pointing down indicating a downward trend
Net income margin 17% 9% This is a yellow arrow pointing to the right indicating no significant change in the trend
       
Balance sheet      
Return on net assets 8% 8% This is a yellow arrow pointing to the right indicating no significant change in the trend
ROE 6% 9% This is a green arrow pointing up indicating and upward trend
EBITDA**/interest expense ratio 8 7 This is a red arrow pointing down indicating a downward trend
       
Cash flow      
Cash-flow growth 10% -21% This is a red arrow pointing down indicating a downward trend
Cash-flow return on net assets 8% 7% This is a red arrow pointing down indicating a downward trend
       
Market-based measures      
Price/earnings ratio 40 45 This is a green arrow pointing up indicating and upward trend
Total shareholder return (TSR) 15% 20% This is a green arrow pointing up indicating and upward trend
       

Figure 2. Health care equipment and supplies industry first half performance scorecard

*Financials through first two quarters; TSR represents composite performance through June 30, 2019
**Earnings before interest, taxes, depreciation and amortization
Source: S&P's Capital IQ database

Over the last few years, the industry’s performance levels have fluctuated, and incentive payouts generally reflected performance. With reduced 2019 growth expectations, the level of annual incentive payouts will illustrate how effectively companies set goals for incentive programs.

These more modest expectations, amplified by continuing trade tensions which could negatively influence foreign market expansion, create an uphill battle for the industry in the second half of 2019. However, an aging global population, rising prevalence of chronic diseases and a favorable reimbursement structure in the U.S. continue to provide opportunities for the industry.

As part of the annual goal-setting process, more companies are bringing additional analytics to the discussion, including predictive analytics. Willis Towers Watson’s predictive performance model (PPM) helps clients measure the probability of achieving goals and aligning pay and performance. To learn more about PPM, follow the link here and watch a brief video (mid-page) explaining how our model can help you calibrate your incentive plan goals.

For a look at first half results for 2019 in the broader S&P 1500, see “S&P 1500 pay-for-performance update: Will weaker 2019 performance reduce incentive payouts? Executive Pay Matters, October 2, 2019.

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