Company financial performance for the S&P 1500 was up in 2018, including income statement, balance sheet and cash flow metrics, according to Willis Towers Watson's quarterly update. However, TSR declined sharply, losing 5 points after two years of double digit growth, with the stock market experiencing considerable volatility amid economic headwinds. This combination of factors may lead to increased scrutiny on company pay for performance plans, as annual incentives may pay out above target given excellent financial performance while long-term plans may be limited, especially in plans where negative TSR is a "gate" or circuit breaker with regard to payouts.
Declining TSR performance will also have a strong impact on quantitative tests by proxy advisors such as ISS and Glass Lewis and may lead to an increase in companies experiencing medium or high levels of concern on proxy evaluation reports, the consultant reports. The key will be comparing performance to peers and ensuring that pay is commensurate with performance and that the relationship between the two is clearly explicated in the proxy statement.