Compensation Committees Adjusting CEO Pay Programs Prior to Financial Crisis, Watson Wyatt Survey Finds - 2 Dec 2008

Compensation Committees Adjusting CEO Pay Programs Prior to Financial Crisis, Watson Wyatt Survey Finds

http://www.watsonwyatt.com/news/press.asp?ID=20176

Balancing Risk Still Poses Significant Challenges in Current Environment

WASHINGTON, D.C., December 2, 2008 — 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.

“The legislative bailout package and the ongoing financial crisis,
coupled with continued pressure from shareholders, the media and
executive pay critics, are leading compensation committees to make
their executive pay programs more shareholder-friendly,” said Ira Kay,
global director of executive compensation consulting at Watson Wyatt.
“But many had been heading down that path already, by factoring in
recent financial performance when establishing pay opportunity levels
for their CEOs, even before the most recent manifestation of the crisis
took hold.”

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. Total direct compensation (TDC) opportunity for CEOs at
high-performing companies was $10.7 million from 2005 to 2007,
noticeably higher than the $8.1 million TDC opportunity for CEOs at
low-performing companies. The lack of a historical relationship between
performance and pay opportunity has been a source of significant
criticism of corporate America. Total direct compensation opportunity
includes base salary, annual incentives and new long-term incentive
stock and cash grants.

While companies are taking steps in the right direction, challenges
still remain. This year’s 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 Kay.
“On the one hand, some level of risk is beneficial to the company as
well as to shareholders and should be rewarded. On the other hand,
there will be a need to carefully monitor the overall risk exposure,
given the current economic conditions and bailout scrutiny. The
challenge for compensation committees will be to walk that fine line.”

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. 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 percent) had stock options that were “underwater”
  in 2007, an increase of 60 percent over 2006. The average strike price
  among these firms was 28 percent below the current share price. These
  values do not reflect additional market declines of the year.
  

“During these uncertain and challenging economic times, we believe
it is more critical than ever that compensation committees and
management implement a balanced portfolio of short- and long-term
incentives that consider the risk of the portfolio and support
sustained management stock ownership,” said Steve Van Putten, East
division executive compensation practice leader at Watson Wyatt and one
of the co-authors of the study.

About Watson Wyatt
Watson Wyatt (NYSE, NASDAQ: WW) is the
trusted business partner to the world’s leading organizations on people
and financial issues. The firm’s global services include: managing the
cost and effectiveness of employee benefit programs; developing
attraction, retention and reward strategies; advising pension plan
sponsors and other institutions on optimal investment strategies;
providing strategic and financial advice to insurance and financial
services companies; and delivering related technology, outsourcing and
data services. Watson Wyatt has 7,600 associates in 32 countries and is
located on the Web at http://www.watsonwyatt.com.

Contact

Ed Emerman

609.275.5162

eemerman@eaglepr.com

Steve Arnoff

703.258.7634

steven.arnoff@watsonwyatt.com