January 7, 2009
Study: Compensation Committees Adjusted Pay Prior to Crisis
– Ira Kay and Steve Seelig, Watson Wyatt Worldwide
We just published a study – entitled “Executive Compensation in Uncertain Economic Times” – that shows that compensation committees had been making significant adjustments to how they compensate their CEOs even prior to the recent financial crisis.
The survey 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.
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.