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Article | Executive Pay Memo North America

The market and financial impact of COVID-19 (coronavirus) — Canadian perspective

A rapidly evolving crisis

Executive Compensation
COVID 19 Coronavirus

By Sebastién Morrissette , Ming Young and Christina Le | April 7, 2020

Without economic data we typically rely on to understand how deep the business downswing may be, the stock market provides needed insights.

“In a war, the economy booms as production ramps out. This war is against an invisible enemy that destroys jobs, incomes and output.” — David Rosenberg, chief economist and strategist of Rosenberg Research & Associates

The spread of the coronavirus (COVID-19) and related economic impact are evolving at a rapid pace. The shutdown of certain sectors and the resulting layoffs of many employees are rippling through the economy. Without prior precedents, hard economic data — to help us understand how deep or protracted the business downswing might be — are limited. But for now, we can use an obvious data source, the stock market, to provide some insights. The past month has been distressing and exceptionally volatile. Besides the impact of COVID-19, the Canadian energy sector has been hammered by the freefall in oil prices.

Figure 1 tracks the year-to-date total shareholder returns for S&P/TSX Composite Index companies across a range of economic sectors through Wednesday, March 25. Despite recent announcements made by the Canadian government and a number of emergency stimulus packages totaling more than $200 billion, which had a positive impact on the stock market, most companies are still in the red for this year. Significant variability between sectors will impact how companies manage their compensation programs through 2020.

Figure 1. 2020 total shareholder return by sector, through March 25, 2020
Figure 1. 2020 total shareholder return by sector, through March 25, 2020

Source: S&P’s Capital IQ database

In January, investment analysts expected 2020 to be a softer year for most sectors, and only the industrials, materials and financial sectors were expected to have a better year in 2020. Figure 2 shows 2020 earnings before interest and taxes (EBIT) growth versus 2019 actuals.

Source: S&P’s Capital IQ database; 2020 growth estimates as of March 25, 2020
Figure 2. 2020 EBIT expectations versus 2019 EBIT growth by sector

Source: S&P’s Capital IQ database
Note: Real estate and health care omitted due to insufficient data.

We also reviewed how investment analysts’ expectations for 2020 EBIT have evolved since January. All sectors show a decline in expectations, averaging negative 4% since January, excluding the energy sector (Figure 3 ). There’s also been a considerable decline in expectations in the energy sector, which is likely to get worse as global demand for oil decreases, and Canadian crude oil prices are plummeting to historical lows. While other sectors may fare better, there may be turbulent times ahead, and expectations could further decrease.

Sector                      YTD change
                     in estimated
                       2020 EBIT
TSX Composite -6%
TSX 60 -4%
Energy -70%
Materials -8%
Discretionary -7%
Industrials -5%
Technology -5%
Utilities -2%
Communication services -1%
Financial -1%
Staples -1%

Figure 3. Year-to-date change in estimated 2020 EBIT, as of March 25, 2020

Source: S&P’s Capital IQ database; expectation change from January 10, 2020, to March 25, 2020.
Note: Real estate and health care sectors have been omitted due to insufficient data.

No one knows how deep the economic impact will be, how long we will spend at the trough or how quickly we can recover. Despite the adoption of stimulus packages for individuals and businesses by the federal government totaling more than $200 billion, the stock market continues to plummet, and the first quarter of 2020 now represents the worst quarter for the S&P/TSX Composite index since the economic crisis of 2008. The prospect of a recession is real. We will continue to monitor and report on how the situation unfolds in the weeks and months ahead.

Given the likely impact on financial performance, we expect many companies will likely pay 2020 bonuses at the lower end of the range. Some companies may want to consider taking action if they appear on track to earn zero and risk losing plan participants’ engagement early in the 2020 fiscal year. This may mean the application of discretion at year-end. Or it could involve a decision to widen the ranges around incentive plan goals. A more dramatic response might be to zero out the original 2020 plan and focus on second-half performance. Of course what options make sense will vary based on each client’s situation, considering financial impact, social context, prior pay results and the rationale for taking action.

We suggest that discussions occur early and often to understand the potential impact and to discuss options to address the situation. Even so, we recognize that the degree of uncertainty for the balance of 2020 will make it difficult to make any specific decisions at this time.

For a similar analysis for the U.S. market, see our article, The economic impact of COVID-19 (coronavirus), Executive Pay Matters, March 19, 2020.


For information about steps that North American companies are taking to protect their employees from the COVID-19 pandemic, see our press release (North American companies take steps to protect employees from coronavirus epidemic).

You may also be interested in the Harvard Business Review article co-authored by Willis Towers Watson’s Dr. Jeff Levin-Scherz, which outlines 8 Questions Employers Should Ask About Coronavirus.

Additional information and resources can be found on Willis Towers Watson’s COVID-19 microsite.

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