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Article | Executive Pay Matters

S&P 1500 pay-for-performance update: Will weaker 2019 performance reduce incentive payouts?

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By Ryan Lucki , Chris Kozlowski and Steve Kline | October 2, 2019

The second half of 2019 presents an uphill climb for the S&P 1500 to improve financial performance that will extend the trend of strong incentive plan payouts. 

Financial results through the first two quarters of 2019 have trended below the same period last year. And six month financial results are generally below analysts’ expectations for the year.

Our article this quarter provides an update on 2019 performance trends and expectations. Last quarter our blog focused on the pay implications of 2018 performance for annual and long-term incentive awards that concluded during the year. Annual incentives trended above target, and long-term incentives paid higher than what we’ve observed the last few years, in large part due to a strong stock market (for more details, see “S&P 1500 pay-for-performance update: 2018 incentive plan payouts trend above targetExecutive Pay Matters, July 16, 2019).

Figure 1 explores investment analysts’ expectations at the beginning of 2019 compared with 2018 results. Analysts’ expectations for revenue and earnings per share (EPS) were lower than 2018 results, while earnings before interest and tax (EBIT), cash flow and return on equity (ROE) were expected to be up.

Figure 1. S&P 1500 analysts’ growth expectations for 2019
Figure 1. S&P 1500 analysts’ growth expectations for 2019

Source: S&P's Capital IQ database

Figure 2 shows performance results generally are down compared with the same six-month period last year:

  • Income statement growth and margins declined across the board, although the industrials, health care, and technology sectors bucked the trend with stronger results.
  • Returns have held steady.
  • Cash-flow growth has decelerated.
  • Total shareholder return for the first half of 2019 was up considerably in the first six months, but the market has become more volatile in the third quarter.
 
  S&P 1500 median*  
Measures 1st half 2018 1st half 2019 2019 trend
Income statement      
Revenue growth 8% 4% This is a red arrow pointing down indicating a downward trend
Earnings before interest and taxes (EBIT) growth 7% 4% This is a red arrow pointing down indicating a downward trend
Earnings per share (EPS) growth 18% 5% This is a red arrow pointing down indicating a downward trend
EBIT margin 12% 11% This is a red arrow pointing down indicating a downward trend
Net income margin 8% 8% This is a yellow arrow pointing to the right indicating no significant change in the trend
       
Balance sheet      
Return on net assets 9% 9% This is a yellow arrow pointing to the right indicating no significant change in the trend
ROE 11% 11% This is a yellow arrow pointing to the right indicating no significant change in the trend
EBITDA**/interest expense ratio 9 8 This is a red arrow pointing down indicating a downward trend
       
Cash flow      
Cash-flow growth 6% 2% This is a red arrow pointing down indicating a downward trend
Cash-flow return on net assets 8% 8% This is a yellow arrow pointing to the right indicating no significant change in the trend
       
Market-based measures      
Price/earnings ratio 22 20 This is a red arrow pointing down indicating a downward trend
Total shareholder return (TSR) 3% 18% This is a green arrow pointing up indicating and upward trend
       
Figure 2. S&P 1500 year-to-date financial 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

On the surface, the financial trend portends weaker incentive plan payouts for 2019, but if companies set 2019 incentive plan goals conservatively, then payouts could remain robust. If goals were not calibrated around reduced expectations, then incentive plan payouts are likely to be weaker. How this all plays out remains to be seen.

Analysts have lowered their expectations as the year has progressed. What’s potentially troubling is that despite lowered expectations, actual results are trending below analysts’ expectations. The second half of 2019 presents an uphill climb, particularly given the risks of trade disputes. But consumer confidence remains high, and loosening monetary conditions may help keep a recession at bay.

What is your company’s financial trajectory, and are you on pace to achieve expectations? Is your company on track to earn target incentives or better? Will investors and executives appreciate how your performance-based pay aligns with performance? Now is the time to start considering the 2020 incentive plan framework. Have you considered how predictive analytics can help you calibrate goals based on the probability of achievement? Consider how our proprietary predictive performance model (PPM) can help. To learn more about PPM, follow the link here, and watch a brief video explaining how our model can help you calibrate your incentive plan goals.

For a look at how the first half of 2019 is shaping up for key sectors and select industries, click on the links below.

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