Human Resources: “Realizable” Pay Is Key Measurement

WASHINGTON, November 28, 2006 – Executives at financially high-performing
companies are realizing greater compensation than their counterparts at
underperforming companies, suggesting that corporate America’s executive
pay-for-performance model is working for most companies, according to a new
study by Watson Wyatt Worldwide, a leading global consulting firm.

In its study, Watson Wyatt found that CEOs at higher-performing companies
have significantly greater “realizable” pay, especially from long-term
incentive (LTI) awards. Realizable pay calculates the current value of
outstanding LTI awards (typically, in-the-money stock options and
performance share payouts) granted over a specific time frame (in this
case, 2003-2005) using the ending stock price. This method contrasts with
pay opportunity, a more traditional analysis that calculates the value of
the new LTIs as of the grant date, using the Black-Scholes value of stock
options. Between 2003 and 2005, the median realizable LTI for CEOs at
higher-performing companies was $4.4 million, compared with just $1.5
million for CEOs at lower-performing companies. The study, based on public
data from 793 companies in the S&P Composite 1500, a stock index that
includes companies of various sizes in all sectors of the U.S. economy,
found similar results for realizable total pay, which includes realizable
pay from stock incentives as well as cash compensation and annual bonuses,
which tend to be less sensitive to shareholder returns.

Companies Median
Total
Returns to
Shareholders Median 3-Year
Cumulative
Realizable LTI 3-Year Cumulative
Realizable Total Pay
High Performer 32.3% $4.4 million $8.0 million
Low Performer 9.8% $1.5 million $5.0 million
All 19.8% $2.8 million $6.4 million

“Examining how much pay an executive can realize is an important step
forward in measuring the sensitivity between actual pay and performance,”
said Ira Kay, global director of executive compensation consulting at
Watson Wyatt. “And directors and shareholders will be pleased that the
results show that companies with a well-designed incentive program are only
paying for the performance they get.”

A critical element in this design is properly setting the range of
potential compensation opportunity. The Watson Wyatt study also found that
some companies may be setting their pay opportunities higher than optimal
from a shareholder perspective. Companies that offer executives
above-market LTI pay opportunities but have only average stock price
performance may still deliver above-market pay — not a shareholder-friendly
outcome. In contrast, companies that offer average incentive opportunities
are delivering average pay for average performance and high pay only for
high performance, a much more shareholder-friendly result.

Copies of the survey are available here

About Watson Wyatt Worldwide

Watson Wyatt (NYSE: 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 6,000 associates in 30
countries and is located on the Web at www.watsonwyatt.com.

Contact

Ed Emerman, 609/452-5967, eemerman[at]eaglepr.com
Emily Rieger, 703/258-7634, emily.rieger[at]watsonwyatt.com

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