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:
“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 www.watsonwyatt.com.