Shareholder Returns, CEO Stock Holdings Linked

March 25, 2001 ( - Shareholder returns are significantly higher at firms with higher levels of executive stock ownership, according to a new study.

Watson Wyatt found that among the 1,199 companies studied with complete information, performance was much better at companies with high CEO pay.  In fact, the Tobin’s Q of companies with CEOs who had high ownership in 1995 is 40% higher than those led by lower ownership CEOs. 

The report found that higher performing companies had CEOs that owned nearly 60% more stock in 1995 than low-performing companies.

The survey’s results indicate that

  • executive positions at US companies saw an average increase in total cash compensation of 7.8% from the prior year
  • the average stock option grant value to the CEO increased to almost $4 million in 2000, from $3.2 million the previous year
  • for companies with stock ownership guidelines for their CEOs, the ownership multiple increased from 4.3 to 4.5 times their base salary over the prior year

The average budgeted merit increase for 2001 remains modest, consistent with merit increases in previous years. This suggests that companies are placing greater emphasis on performance-based pay than on fixed cost salaries.

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. However, the individual increase or decrease in the grant value multiple was highly dependent on the specific job.

The findings were based on two Watson Wyatt studies.  One was the CEO Pay Study, which looked at compensation levels of CEOs at more than 1,300 large public companies as reported in fiscal year 2000 proxy statements.

The second study is Watson Wyatt Data Services’ 2000/2001 Survey of Top Management Compensation, which includes the results from 13,115 executives at 1,545 companies.

The executive summary is at: