Laggard Co's CEOs See Options' Value Slammed

October 31, 2002 ( - One place executives of underperforming companies continue to get hit hard is in the value of their unexercised stock options, according to a new study.

The Watson Wyatt Worldwide study found that the options’ value (fair market value minus exercise cost) in low-performing companies plummeted 66.5% – from $12 million in 2000 to $4 million last year.

Executives with one-year total returns to shareholders (TRS) above the median saw the value of their stock options more than double to $5.1 million, according to the study. Overall, the options’ value dropped 9.2% from a $5.2 million median in 2000 to a $4.8 million median the following year for CEOs at the nearly 600 large firms in the research project.

The study also found a relationship between a company’s financial performance – as measured by one-year TRS – and changes in its CEO’s pay package

Indeed, while total actual pay for CEOs at high-performing firms (TRS = +23%) were up about 30% in 2001, CEOs at low-performing companies (TRS = -27%) experienced a compensation decline of almost 30%.

Among the other key findings in the Watson Wyatt study:

  • companies with CEOs who own a significant amount of the company’s stock perform better than companies with lower executive ownership as measured by TRS, return on assets, return on equity, and earnings growth
  • companies with high CEO pay have better historical financial performance, as measured by TRS, than companies with low actual pay
  • companies that directly link executive and shareholder interests have significantly better financial performance.