Stock Option Values Reflect Performance in 2005

February 28, 2006 ( - CEOs at high-performing companies saw large gains in the value of their unexercised stock options last year, while those at poor-performing companies saw significant decreases, according to a new CEO pay analysis by Watson Wyatt.

In a press release, Watson Wyatt said it found that the median value of unexercised stock options for CEOs at high-performing companies soared 47.3% to $29 million in 2005, while CEOs at weak-performing companies experienced a decline 51.6% to $5.7 million in the value of their unexercised stock options.

“Unrealized gains on stock options are one of the best indicators of pay-for-performance sensitivity,” said Ira Kay, global director of compensation consulting at Watson Wyatt, in the release.  “Despite the occasional anomaly,both shareholders and boards should be pleased by the strong correlation between an executive’s pay and how well – or poorly – a company’s stock performs.”

High-performing companies returned 24.5% to shareholders last year,while low-performing companies had a minus three percent total return to shareholders.  The median value of unexercised stock options declined by more than 50% among low-performing companies because stock options are highly leveraged and a small decline in returns to shareholders can lead to a large decrease in option value.

Kay said that, due the new Financial Accounting Standards Board rules on stock option expensing, Watson expects to see other forms of executive incentives, such as performance-based stock.   “Although the vehicles may change, the goal of keeping executives motivated and engaged while effectively tying their pay to performance is as important as ever.”