“We must out-produce them overwhelmingly” – Franklin D. Roosevelt, addressing Congress in December 1941. The U.S. rose to FDR’s challenge to win WWII and become the most productive industrial sector in the world. In doing so, it created wealth for a generation of baby boomers. But in the 1960s and 1970s, the tide began to turn. Global competition emerged from Japan, Korea, Germany and later, China. The factories and technologies in these emerging markets were more efficient and more advanced than in the U.S., and their labor costs were much lower. A couple of recessions and trade policies that promoted globalization accelerated the decline of the U.S. industrial sector.
More than 80 years after Roosevelt’s address, President Trump is moving to revitalize the U.S. industrial sector. While it’s true that some domestic and foreign companies have announced significant investment in the U.S. industrial sector, it’s too early to tell how things will turn out.
It’s time to take stock: to review how the U.S. industrial sector has performed in recent years, whether CEO pay has been aligned with such performance, and what near-term financial expectations look like for the sector. In doing so, we reviewed the S&P Industrials 400, focusing on the 58 companies with calendar fiscal years (i.e., the “mid-cap industrials”).
Total shareholder return (TSR) of the mid-cap industrials was pretty compelling over the five years ending 2024. They earned a healthy compound annual growth rate of 12.9% for the mid-cap industrials versus 14.1% for the S&P 1500 composite and 10.3% for the S&P 400 (mid-cap).
Most of the mid-cap industrials have aligned their CEOs’ pay with TSR performance. The chart below plots the mid-cap industrials in terms of five-year TSR percentile and compensation actually paid (CAP) percentile, as defined in the pay versus performance (PVP) disclosure rules.
What we call the “alignment zone” is where CAP and TSR percentiles fall within 25 percentage points of each other, e.g., TSR of 60th percentile and CAP of 75th percentile would be considered to be aligned due to the 15-point differential.
Companies above/left of the alignment zone have a CAP percentile that is materially higher than their TSR percentile. Those below/right of the alignment zone have a CAP percentile that is materially lower than their TSR percentile.
Most of the mid-cap industrials show pay as being aligned with TSR. The prevalence of the mid-cap industrials by pay alignment zone:
We have found this kind of pay alignment analysis, which relies on disclosures in the relatively new PVP table, to be a helpful tool in assessing the efficacy of incentive plan design. In particular, falling out of the alignment zone should lead to some introspection. Do you have the right weightings on the different incentive programs? Do you have the right performance metrics, are they linked to your business strategy, and are they market-based or financial-based? Have you set compelling performance goals?
We note that the SEC hosted a roundtable discussion of the current executive compensation disclosure requirements on June 26 in which potential refinements (toward simplification) to the current disclosure rules were discussed.
Obviously, the stock market has been volatile thus far in 2025. The nadir came in late March/early April around Liberation Day. But despite all the handwringing, the mid-cap industrials have rebounded to surpass their starting point, which is slightly below the S&P 1500 composite and above the S&P 400.
Growth in the first quarter of 2025 was quite tame for most of the mid-cap industrials. Only the top quartile posted compelling growth results.
| Revenue growth | EBITDA growth | Operating cash flow growth | |
|---|---|---|---|
| 75th percentile | 7% | 8% | 21% |
| 50th percentile | 1% | 2% | 1% |
| 25th percentile | -3% | -12% | -20% |
The current consensus analysts’ estimates for the full year in 2025 are summarized below. Revenue estimates haven’t budged from earlier this year, but EBITDA and cash flow growth estimates have come down slightly compared to earlier this year.
The 2025 full year forecast for the mid-cap industrials looks better than first quarter results, even though the forecast is not terribly compelling. Growth rates in the low single digits don’t tend to drive strong shareholder returns, and weak shareholder returns tend to prove problematic for the alignment of pay and performance and ultimately the say-on-pay shareholder vote.
| Revenue growth | EBITDA growth | Operating cash flow growth | |
|---|---|---|---|
| 75th percentile | 7% | 10% | 13% |
| 50th percentile | 3% | 4% | -1% |
| 25th percentile | 0% | -3% | -13% |
Clearly there are a number of unknowns that are contributing to the present uncertainties, e.g., tariffs and geopolitical risks. However, uncertainties are not new. We endured them during COVID, The Great Recession and the bursting of the tech bubble, just to name a few in this millennium.
When administering your company’s incentive plans, don’t just settle on prominent market practices. The true “best practice” is to make decisions that are market-informed but customized to your circumstances, i.e., picking the right performance metrics and establishing the optimal relationships between goals and payouts. In times like this it’s wise to have experienced, focused advisors willing and able to navigate the uncertainties and to craft incentive plan designs that help create a steadfast focus on performance and reward enduring success.
