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Article | Executive Pay Matters

Retail industry 2018 pay-for-performance update: incentive payouts trend around target

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By Kate King and Chris Marques | September 10, 2019

Stronger fiscal year 2019 financial results, helped by online sales growth, supported 2018 incentive plan payouts.

Annual and long-term incentive plan (LTIP) payouts for fiscal 2019 performance trended around target, with median payouts of 101% and 100% of target respectively.

As we detailed in our last article (“Pay-for-performance retail update: Improved fiscal 2019 financials dispel lackluster predictionsExecutive Pay Matters, May 7, 2019), fiscal 2019 financial results generally improved. Income statement measures, including online sales growth, were better than expected. Although, shareholder returns were not as strong as prior year’s results, the retail industry did outperform the broader S&P 1500.

Our article this quarter explores how fiscal 2019 financial and stock price performance affected annual and performance-based LTI plans ending in fiscal 2019.

Annual incentive payouts

The median CEO bonus improved from 94% of target for 2018 to 101% of target for 2019 (on a consistent CEO basis). Despite improved financial performance, this payout lagged the S&P 1500, which was 115% of target for 2018.

Figure 1 compares the distribution of annual incentive payouts (as a percentage of target) for 2019 and 2018. Overall, the proportion of those who reported above-target payouts was consistent with those who reported below-target payouts, although we note a higher occurrence of companies at the lowest end of the range.

Figure 1. Distribution of CEO bonus payouts in the retail industry
Figure 1. Distribution of CEO bonus payouts in the retail industry

Source: Willis Towers Watson’s Global Executive Compensation Analysis Team, based on about 45 companies with the same CEO in 2019 and 2018. Percentages shown are rounded to the nearest 1%.

While the overall distribution of payouts was comparable year-over-year, payouts actually varied from company to company:

  • 16% of the sample stayed in the same payout bucket in 2019.
  • 47% moved moderately: up or down by one or two ranges.
  • 38% realized a significant change: moving up or down by three or more ranges.

LTIP payouts

We also reviewed how LTIPs with performance periods ending in fiscal 2019 and 2018 paid out, as illustrated by Figure 2. The median LTI payout was remarkably consistent – median payouts for the performance periods ending in fiscal 2019 and 2018 were exactly at target.

Figure 2. LTIP payouts as a percent of target
Figure 2. LTIP payouts as a percent of target

Source: Willis Towers Watson’s Global Executive Compensation Analysis Team, based on about 30 companies' plans ending in 2019 and 2018. Percentages shown are rounded to the nearest 1%.

For plans ending in 2019, we did observe more balance with 35% of companies paying above the target range and 39% paying out below the target range compared to the prior year (33% and 42%, respectively). We also note more companies at the very top of the range (10%) and less at the very bottom (19%) compared to last year (4% and 25%, respectively). These results suggest the retail industry has generally succeeded in setting long-term incentive targets.

Interestingly, LTIP payouts at the company level were more stable than for bonus payouts:

  • 56% stayed in the same payout range in 2019.
  • 11% moved moderately: up or down by one or two ranges.
  • 33% moved significantly: up or down by three or more ranges.

It’s important to also note that since most long-term performance plans pay in stock, the value of the awards upon vesting tends to be amplified, i.e., above-target payouts are generally worth even more due to rising stock prices, whereas below-target payouts tend to suffer from weaker stock prices.

How did your incentives pay out for fiscal 2019? Do participants and investors agree that payouts are appropriate? Pay for performance is a perennial 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).

Next quarter’s article will explore performance through the first half of 2019, providing preliminary insights into potential 2019 incentive plan payouts. For a look at 2018 pay outcomes for CEOs in the broader 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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