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S&P/TSX 60 2018 pay-for-performance update: how weaker 2018 performance impacted incentive payouts

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By Ming Young , Christina Le and Sebastién Morrissette | August 15, 2019

2018 financial performance and annual incentives both trended downward for many Canadian companies, although payouts were only moderately lower than in 2017.

Last year’s weaker financial performance affected median annual executive incentive payouts, and to a lesser extent performance share units (PSUs), for many Canadian companies, as our assessment of S&P/TSX 60 companies’ proxy circulars found. Our last quarterly update highlighted the S&P/TSX 60’s headwinds in 2018 with financial results generally weaker than in 2017. (“Pay-for-performance S&P/TSX 60 update: slowdown in 2018 expected to continue in 2019” Executive Pay Matters, April 4, 2019). Both top- and bottom-line income statement and balance sheet measures generally performed worse in 2018, weighed down by a major fourth-quarter slowdown in the Canadian economy. This was also reflected in an 8% decrease in total shareholder return (TSR). Annual incentive payouts

Figure 1 compares the distribution of annual incentive payouts (as a percentage of target) for 2018 and 2017. While the majority of companies paid above target bonuses, as in 2017, there was a downward trend with a median CEO payout of 118% in 2018 versus 126% in 2017. The proportion of companies that paid significantly above target (130% or above target) declined slightly compared to 2017 (from 48% to 39%). Meanwhile the proportion of annual incentive payouts clustered around the target range (i.e., from 70% to 130% of target) increased slightly (from 43% to 48%).

Figure 1.  Distribution of CEO bonus payouts for the S&P/TSX 60 companies
Figure 1.  Distribution of CEO bonus payouts for the S&P/TSX 60 companies

Source: Willis Towers Watson’s Global Executive Compensation Analysis Team, based on about 44 companies with the same CEOs in both 2018 and 2017. Percentages shown are rounded to the nearest 1%.

There was also year-over-year variation by company: 73% of the sample changed payout buckets in 2018 versus 2017.

  • Only 27% stayed in the same payout range.
  • 50% moved moderately: up or down by one or two ranges.
  • 23% realized a significant change: moving up or down by three or more ranges.

Weaker 2018 financial results drove downward shifts (43% of companies moving one bucket or more down) which outnumbered upward shifts (30% of companies moving one bucket or more up).

We also tested if there was alignment between one-year TSR, including dividends and stock splits, to actual bonus payouts as a percent of target as illustrated in Figure 2.

Figure 2.  Distribution of bonus payouts relative to one-year TSR
Figure 2.  Distribution of bonus payouts relative to one-year TSR

Source: One-year TSR from S&P's Capital IQ database and bonus data from Willis Towers Watson’s Global Executive Compensation Analysis Team

The limited correlation between TSR and actual bonuses highlights that many companies use financial, operational or other measures not directly tied to TSR. Shareholders may struggle to reconcile the robust bonuses with weak TSR. Specifically, companies clustered in the top left quadrant (low or negative TSR and above target bonus) should be aware of their messaging and communication to shareholders to insure they understand the business context behind the bonus payouts.

Performance share unit payouts

We also reviewed how PSUs paid out in 2018 and 2017, as illustrated by Figure 3 (excluding share price change). The median PSU payout decreased slightly from 118% of target in 2017 to 113% of target in 2018.

Figure 3.  PSU payouts as a percent of target
Figure 3.  PSU payouts as a percent of target

Source: Willis Towers Watson’s Global Executive Compensation Analysis Team, based on about 27 companies with the same CEO for plans ending in 2018 and 2017. Percentages shown are rounded to the nearest 1%.

For plans ending in 2018, the majority of payouts were above 110%, which remained unchanged from 2017 (56% of companies). Payouts below 90% of target stayed about the same (11% in 2018 versus 15% in 2017). Payouts in the highest or lowest buckets (i.e., >170% or <=50%) were also relatively unchanged, encompassing 22% of the companies in 2018 compared to 19% in 2017. There was more stability in PSU payouts than observed for bonus payouts:

  • 56% stayed in the same payout range in 2018.
  • 37% moved moderately: up or down by one or two ranges.
  • 7% moved significantly (up or down by three or more ranges).

The greater stability in PSU payouts compared to bonus payouts may be related to the multiyear performance period of the PSUs (capturing better performance in 2016 and 2017) or the focus on relative TSR in many PSU plans, which may not be strongly correlated with the company’s absolute financial performance.

It’s important to also note that since most long-term performance plans are tied to the value of the company’s stock, the value of the awards upon vesting is amplified, i.e., share price adds further leverage for above target multipliers and shrinks payouts further for below target multipliers.

Even with a weaker financial performance, annual incentive payouts were only modestly lower than 2017, perhaps indicating many companies use a portfolio approach of various financial and nonfinancial metrics. Based on analysts’ estimates, financial growth in 2019 is expected to show continued weakness in top-line growth but improvement in both bottom-line and cash-flow growth.

How did your incentives pay out for 2018? Do participants and investors agree that payouts are appropriate? Pay for performance is a constant challenge. Willis Towers Watson has developed deep analytics to help our clients choose the right metrics, set the right targets and calibrate the appropriate range of goals and payouts around the target. If you need to rethink the incentives your company provides, consider how predictive analytics can elevate your company’s pay-for-performance programs (follow this link to learn more).

Stay tuned for our next update which will explore 2019 performance through the first six months, providing preliminary insights into potential 2019 incentive plan payouts. For a look at 2018 pay outcomes for CEOs in the U.S. S&P 1500, see “S&P 1500 pay-for-performance update: 2018 incentive plan payouts trend above target,” Executive Pay Matters, July 16, 2019.

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