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S&P/TSX 60 pay-for-performance update: Mixed results make for unpredictable incentive payouts 

Executive Compensation
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By Ming Young , Christina Le and Sebastién Morrissette | October 3, 2019

It’s too close to predict how top Canadian company bonuses are likely to pay out for 2019.

In this quarter, our article provides an update on 2019 performance trends and expectations. Last quarter our article focused on the implications of performance for annual and long-term incentive awards in or ending in 2018. While there was a slight decrease in CEOs’ actual bonuses compared to the previous year, bonuses continued to trend above target. Performance share units (PSUs) paid slightly below 2017 levels, most likely due to negative stock market returns in 2018. (For more details, see “S&P/TSX 60 2018 pay-for-performance update: how weaker 2018 performance impacted incentive payouts,” Executive Pay Matters, August 15, 2019.)

Figure 1  outlines investment analysts’ expectations at the beginning of 2019 compared with 2018 results. Overall, the analysts are expecting weaker growth in 2019 compared to last year, with the exception of cash flow.

Figure 1. S&P/TSX 60 analysts’ growth expectations for 2019
Figure 1. S&P/TSX 60 analysts’ growth expectations for 2019

Source: S&P's Capital IQ database

Figure 2 below highlights financial results for the S&P/TSX 60 over the first two quarters of 2019, as compared with 2018 results over the same period. Overall, results are mixed — some metrics trending higher, while others are trending lower, but by one or two percentage points.

  • Revenue growth is lower than last year’s results and slightly below the analysts’ expectations as a result of slower growth in the energy and materials sectors. On the other hand, consumer staples, industrials and financial companies are showing improvement over last year.
  • While revenue is growing more slowly, earnings growth is higher than what was observed at this time last year and above analysts’ expectations.
  • Meanwhile, profit margins are slightly downward or flat as compared with last year.
  • Return metrics have held relatively steady, with a slight increase in return on net asset (RONA) and return on equity, and a slight decrease in cash-flow return.
  • Cash-flow growth has slowed and is significantly below analysts’ expectations.
  • Total shareholder return is significantly higher than last year’s results for the first six months, while the price/earnings ratio is slightly lower compared with last year.
 
  S&P/TSX60 median*  
Measures 1st half 2018 1st half 2019 2019 trend
Income statement      
Revenue growth 6% 4% This is a red arrow pointing down indicating a downward trend
Earnings before interest and taxes (EBIT) growth 6% 8% This is a green arrow pointing up indicating and upward trend
Earnings per share (EPS) growth 6% 9% This is a green arrow pointing up indicating and upward trend
EBIT margin 15% 14% This is a red arrow pointing down indicating a downward trend
Net income margin 10% 10% This is a yellow arrow pointing to the right indicating no significant change in the trend
       
Balance sheet      
Return on net assets 6% 7% This is a green arrow pointing up indicating and upward trend
ROE 11% 12% This is a green arrow pointing up indicating and upward trend
EBITDA**/interest expense ratio 9 8 This is a red arrow pointing down indicating a downward trend
       
Cash flow      
Cash-flow growth 10% 6% This is a red arrow pointing down indicating a downward trend
Cash-flow return on net assets 9% 7% This is a red arrow pointing down indicating a downward trend
       
Market-based measures      
Price/earnings ratio 20 19 This is a red arrow pointing down indicating a downward trend
Total shareholder return (TSR) 2% 16% This is a green arrow pointing up indicating and upward trend
       

Figure 2. S&P/TSX 60 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

Mixed results make it difficult at this point to estimate incentive plan payouts for 2019. However, considering that profitability and return measures are typical short-term incentive plan metrics, the higher performance from EBIT, EPS and return measures may bode well for above-target plan payouts for 2019. It is unclear on how the recent strong market returns will impact long-term incentive plan payouts given the typical three-year performance periods and emphasis on relative performance versus peers or various indices.

The trade disputes between the U.S. and China appear to be having a negative impact on the U.S. economy, with U.S. company financial performance generally trending downward in 2019 — most indicators are lagging 2018. It will be interesting to observe if and to what extent this will affect the Canadian economy and financial performance of the S&P/TSX 60. For a look at how the first half of 2019 is shaping up in the U.S., see “S&P 1500 pay-for-performance update: Will weaker 2019 performance reduce incentive payouts?Executive Pay Matters, October 2, 2019.

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? It is time to start developing 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.

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