CEO Comp, Options Linked to Stock Returns

December 27, 2000 (PLANSPONSOR.com) - Investors might pay particular attention to executive compensation levels, with two new studies finding a strong correlation between high CEO stock ownership and compensation - and strong financial performance.

Watson Wyatt’s CEO Pay Study found that companies with CEOs who received higher-than-median total compensation had a 5-year total return to shareholders (TRS) of 18.3%, compared with 10.2% at companies with pay below the median.

High CEO ownership was also associated with superior corporate financial performance as measured by return on equity (ROE), return on assets (ROA), and earnings per share (EPS) growth, according to the study.

The study examined compensation levels of CEOs at more than 1,300 large public companies – more than four times the number considered in the prior year’s analysis.

Comp Counts

In addition, Watson Wyatt Data Services? 2000/2001 Survey of Top Management Compensation found that executive positions at U.S. companies saw an average increase in total cash compensation of 7.8% compared with the prior year. The average stock option grant value to the CEO increased to almost $4 million in 2000, from $3.2 million in the previous year.

The Tobin?s Q of companies with CEOs who had high ownership in 1995 was 40% greater than those led by lower ownership CEOs, suggesting that investors are willing to pay a premium where a company’s leadership has aligned its interests with that of shareholders.

Higher performing companies, as measured by five-year annualized TRS, had CEOs owning nearly 60% more stock in 1995 than low-performing companies.

Merit-less

Still, the average budgeted merit increase for 2001 remains modest, consistent with merit increases in previous years. This suggests that companies are continuing to emphasize performance-based pay rather than fixed-cost base salary increases.

Executive pay is projected to increase 4.6%, equal to that for 2000. Exempt pay increase budgets slipped slightly to 4.3% from 4.4% this year, although nonexempt increases retained a 4.2% budget increase.

Positions with greater responsibility and accountability tend to have their compensation packages more highly leveraged with stock option grants. Overall, increases in stock option grants to senior executives, as a multiple of base salary, appear to have leveled off in the last two years according to the study.

A summary of the report is at http://wwwwatsonwyatt.com

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