By Edgar H. McGaughey III and David R. Bixby
Texans like to talk a big game, bragging on the size, diversity (geographic and demographic), rich heritage, and business success of our state. As someone once said, “It ain’t braggin’ if you can back it up.” As of 2011, Texas was home to 51 Fortune 500 companies, the second largest economy in the United States, and the 14th largest economy in the world (trailing Australia and edging ahead of Mexico, according to IMF statistics). As we last did in 2010, Pearl Meyer & Partners attempted to wrap our arms around the varied mix of companies that make up this economic juggernaut with our 2012 review of the Texas 250.
Initially, this study considered the state’s 280 largest corporations and aimed to reduce this number to 250 by excluding subsidiaries, bankruptcies and restructurings. However, despite these omissions the study reaches down to the top 260 firms to capture a portion of the rather large grouping of companies in the $100mm to $200mm revenue range.
“Texas 250” Industry Demographics
As we saw in 2010, our group of Texas 250 companies includes a significant contingent of energy firms. Energy firms make up over 40 percent of the sample (112 companies). This is hardly surprising for the home of Spindletop, Dallas, and once upon a time the Houston Oilers (“sniff”). However, like the physical landscape of Texas, our sample of the Texas corporate landscape offers quite a bit of variety as well. Aside from energy our study includes companies across nine other industry sectors, with the Industrial (33), Consumer Discretionary (32), and Financial (27) sectors each making up more than 10 percent of the sample.
As part of our review, we identified the top performing companies for 2011 across the Lone Star State. There are many ways in which analysts and companies assess corporate performance. The preferred measures used to capture the best performing companies vary across industry sectors. For purposes of our analysis, we used the same three measures, TSR, (Total Shareholder Return) EPS growth (earnings per share) and ROCE, (return on capital employed) for all the companies in our sample. However, while the same performance measures were applied to all companies, each sector is subject to different market conditions and shareholder expectations. Consequently, we assessed each company relative to other companies within its respective industry sector.
The three factors were weighted, with TSR receiving 50 percent, EPS 25 percent and ROCE 25 percent. An overall ranking was created based on the weighted average of these three measures. TSR received more weight as the measure most closely aligned with shareholder interest. For TSR, EPS and ROCE, each Texas 250 company earned a summary score used to rank-order its performance within its respective sector or sub-sector for energy firms – due to the large number of energy companies, PM&P divided the group into six sub-sectors. Finally, to bring some order to the data, a truly high-performing company in our analysis must have ranked in the top quartile for each of the three measures we considered.
High Performers by Industry Category
The list of Texas high performing companies appears in the table(s) below. Each company’s score reflects the percentile ranking of their weighted average performance score within their respective industry group. All companies listed below had a weighted average score that ranked in the top quartile of their industry group.PM&P does not warrant the accuracy of this data nor the appropriateness of these measures for any given firm, although the three performance measures used for this analysis are among the most commonly used for the assessment of long-term shareholder value creation.
The Best of the Best
The companies listed previously, who performed among the top quartile (top 25 percent) of peers for all three performance measures, deserve particular recognition. The following companies performed in the top quartile for all three performance measures among their industry peers in Texas (sorted alphabetically):
Pay and Performance
Our compensation review (the details of which are available on our Web site www.pearlmeyer.com) relied upon data collected from 2012 proxy statements filed in late 2011 or early 2012. How well pay outcomes align with performance depends upon each industry sector, each company’s performance cycle, and the specific measures each company uses to determine incentive plan payouts – making broad generalizations across our Texas sample problematic.
It has been our experience that most companies are getting this alignment of pay and performance right – if for no other reason than top executive pay for publicly-traded firms is typically heavily weighted toward equity-based compensation – meaning that realized pay will typically have a strong correlation with total shareholder return outcomes at the very least.
Helping to enforce pay-performance alignment, boards and compensation committees are increasingly using long-term incentive award devices with payouts tied to achievement of absolute or relative performance goals. We have watched the prevalence of this practice increase, a trend that has been accelerated with the advent of broadly-mandated shareholder advisory votes on executive pay programs (“Say-on-Pay”). We expect this trend to continue.
Performance outcomes will vary by year, industry cycle and the measure or measures by which the company and its board have selected as indicators of short and long-term performance for the company and its executives.
Edgar H. McGaughey III is Managing Director & Houston Office Head, and David R. Bixby is Managing Director of Pearl Meyer & Partners. PM&P is an independent compensation consultancy firm advising in the areas of governance, strategy and compensation program design. www.pearlmeyer.comDefinitions Total Shareholder Return (TSR): The total return of a stock to an investor is calculated as the difference between the share price at the end of the period and the share price at the beginning of the period added to the dividends paid and divided by the share price at the beginning of the period. Reflects performance through December 31, 2011.
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