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Article | Executive Pay Memo North America

S&P 1500 pay-for-performance update: 2018 incentive plan payouts trend above target

Executive Compensation
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By Ryan Lucki , Chris Kozlowski and Steve Kline | July 16, 2019

S&P 1500 incentive plans generally paid above target in 2018, reflecting improved financial performance, but what do softening expectations mean for future incentive payouts?

Incentive plans generally paid above target in 2018, reflecting improved financial performance over the last several years. Performance results and incentive plan payouts are a telling part of a company’s pay-for-performance dialogue with its shareholders. Do your performance results support high, average or low payouts?

Our blog this quarter evaluates the S&P 1500’s 2018 incentive plan payouts using 2018 performance results as a starting point (see “S&P 1500 pay-for-performance update: Strong financials but negative shareholder returns,” Executive Pay Memo, February 21, 2019). Figure 1 recaps historical performance results, which pointed to an upward trend of financial results despite a decline in shareholder returns at the end of the 2018.

Measure 2016 2017 2018
Revenue growth 3% 6% 8%
Earnings before interest and taxes (EBIT) growth 4% 5% 7%
Earnings-per-share growth 5% 5% 17%
Return on net assets 10% 10% 10%
Cash-flow growth 2% 2% 7%
Total shareholder return 13% 21% -5%
Figure 1. Recap of S&P 1500 median results

Source: S&P's Capital IQ database

Annual incentive plans generally paid above target, reflecting improved financial performance versus the previous year. The median bonus payout for S&P 1500 CEOs was 115% of target for 2018 and 117% of target for 2017 performance, although the median doesn’t tell the whole story. Figure 2 illustrates the distribution of the bonus payouts for 2018 and 2017 for approximately 700 S&P 1500 CEOs. The majority (54%) earned above the target range in 2018 (more than 110% of target), nearly double that of the 28% falling below the target range (90% or less).

The distribution of S&P 1500 bonuses continues to follow a bell-shaped curve. The shape of the curve tends to hold steady in most years; but there’s a fair amount of change at the company level, moving up and down the distribution curve over time.

  • 30% of companies stayed in the same payout range in 2018.
  • 46% changed meaningfully (moved up or down by one or two ranges).
  • 24% experienced a significant annual swing, moving up or down by three or more ranges.

The majority of CEO pay though is provided in long-term incentives (LTI). Figure 3 shows the distribution of LTIP payouts for plans ending in 2018 and 2017.

LTI plans paid 111% of target at the median for cycles concluding in 2018, higher than the 100% of target observed over the last two years. The distribution of payouts is skewed more towards the top end in 2018 with just over 50% paying above the target range (more than 110%) and 30% below the target range (90% or less). We also observed changes in individual company payouts year-over-year, albeit to a slightly lesser extent than with annual incentives.

  • 39% of companies stayed in the same payout range in 2018.
  • 37% changed meaningfully (moved up or down by one or two ranges).
  • 24% experienced a significant annual swing, moving up or down by three or more ranges.

Most long-term performance plans pay in stock, which typically amplifies the results (i.e., above-target payouts are worth even more when stock prices rise, whereas below-target payouts tend to suffer from weaker stock prices). Stock price appreciation drove up the median payout to 134% of target in 2018 compared to 127% of target in 2017.

Despite improved financial performance and incentive payouts, expectations for 2019 include decelerating growth (revenue and EBIT) — the first time in several years expectations have softened. Still, other measures, such as return on equity and cash flow, show some signs of strength.

What does all this mean for future incentive payouts? It sure feels like a high-water mark. But if companies were conservative in setting 2019 goals, we could see the above-target trend persist. Check our blog next quarter as we update 2019 performance at the half year for preliminary insights into potential 2019 incentive payouts.

For further insights on key sectors and select industries, click on the links below.

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