Reversing a declining trend over the past two years, the in-the-money value of unexercised CEO stock options jumped 53% to a median of $8.3 million in 2003 from a median of $5.4 million in 2002. Also on the rise were annual CEO bonuses – up 13% to an average in excess of $1 million – and bases salaries – up 8.3% to an average $818,000, according to Watson Wyatt’s analysis of 57 proxies filed at large US companies whose fiscal year ended between June 30, 2003 and October 31, 2003.
More in-the-money stock options though had a negative effect on stock option overhang levels. As option exercises waned during 2003, stock option overhang went up to 16.1% in 2002 from 15.6% in 2001.
Not surprisingly, and verified by rising CEO compensation levels, Watson Wyatt found a strong correlation between a company’s financial performance – as measured by one-year total returns to shareholders – and changes in its CEO’s annual cash compensation. While total cash pay for CEOs at high-performing companies increased nearly 42% in 2002, their counterparts at low-performing companies experienced a decline in total cash pay of nearly 7%. Further, Watson Wyatt found c ompanies with high CEO stock ownership levels had better financial performance than companies with lower executive ownership, as measured by total returns to shareholders, return on assets, return on equity and earnings growth.
The upward trend though may be short lived as companies are trying to determine the best of course of action for the looming threat of mandatory stock option expensing. Under most projections, companies will back away from using stock options, thus lowering total compensation totals for CEOs going forward.
“After two consecutive years of declining pay, 2003 should prove to be a much more rewarding year financially for CEOs, due to the rising stock market and improved corporate performance,” Ira Kay, national director of compensation consulting at Watson Wyatt said in a news release. “But with the accounting expense for stock options looming, this may be the last spike in option-related compensation. We expect companies to move away from using primarily stock options to using a portfolio of equity plans that will be only partially comprised of stock options.”
Copies of Watson Wyatt’s Annual Report on Executive Pay and Stock Option Overhang are available at www.wastonwyatt.com .