Watson Wyatt Finds CEO Pay Changes Prior to Financial Crisis

December 2, 2008 (PLANSPONSOR.com) - Compensation committees at U.S. companies had been making significant adjustments to how they compensate their chief executives even prior to the recent financial crisis, according to an annual study by Watson Wyatt, a leading global consulting firm.

Watson Wyatt’s annual analysis on executive pay found that, for the first time in years, executives at companies that performed well were granted larger pay opportunities than their counterparts at weaker companies, according to a press release. Total direct compensation (TDC) opportunity for CEOs at high-performing companies was $10.7 million from 2005 to 2007, compared to an $8.1-million TDC opportunity for CEOs at low-performing companies. TDC opportunity includes base salary, annual incentives, and new long-term incentive stock and cash grants.

Challenges in pay practices still remain, as the study also reveals that companies granting riskier compensation packages – a heavier mix of stock options with higher stock price volatility – tend to grant higher total compensation opportunity ($12.5 million versus $7.1 million for CEOs at companies granting less risky compensation).

“Companies offering compensation programs that reward risk should expect to see significant challenges in the current bailout environment, as the government will want to discourage taking on risk in compensation programs in the future, not encourage it,” said Ira Kay, global director of executive compensation consulting at Watson Wyatt, in the press release.

Other findings from the survey include:

  • CEOs at high-performing companies continue to earn more in realizable pay than their low-performing counterparts. At companies with above-median three-year total return to shareholders (TRS) from 2005 to 2007, CEOs earned a median realizable long-term incentive value of $5.5 million compared to $1.4 million for CEOs at companies with below-median TRS.
  • Consistent with previous surveys, companies with high CEO stock ownership levels significantly outperformed companies with low CEO stock ownership levels.
  • Even before the recent stock market slump, one out of three companies (34%) had stock options that were underwater in 2007, an increase of 60% over 2006. The average strike price among these firms was 28% below the current share price. These values do not reflect additional market declines of the year.

Watson Wyatt’s 2008/2009 Report on Executive Pay, “Executive Compensation in Uncertain Economic Times,” is based on public data from 1,058 companies in the S&P Super 1500 that filed proxies prior to July 2008.