Human Resources: Watson Wyatt Study Reveals Strong Link Between CEO Realizable Pay andPerformance

WASHINGTON, December 11, 2007 – Executives at 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, according to a new study by Watson
Wyatt Worldwide, a leading global consulting firm. Separately, the study
also found that a growing number of workers are forfeiting “in-the-money”
stock options and companies continue to pull back on broad-based stock
options.

Watson Wyatt’s annual report on executive compensation found that CEOs at
high-performing companies earned significantly more “realizable” pay
between 2004 and 2006, especially from long-term incentive (LTI) awards.
Realizable pay calculates the current value of outstanding LTI awards
(typically, in-the-money stock options, restricted stock and performance
share payouts) granted over a specific time frame (in this case, 2004-2006)
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 2004 and 2006, the median realizable LTI for CEOs at
higher-performing companies was $5.2 million, compared with just $1.7
million for CEOs at lower-performing companies. The study, based on public
data from 1,072 companies in the S&P Super 1500, found similar results for
realizable total direct compensation (TDC), which includes realizable pay
from stock incentives as well as cash compensation and annual bonuses,
which tend to be less sensitive to shareholder returns.

Realizable Pay for CEOs Aligns With Financial Performance*

Number of companies Cumulative TRS (2004-2006) Cumulative realizable LTI
value (MM$) Cumulative realizable TDC (MM$)
High TRS 536 99% $5.2 $10.5
Low TRS 536 17% $1.7 $6.0
All Companies 1,072 49% $3.3 $7.9

* All numbers and percentages are medians except for number of companies.

“The evidence from this year’s study clearly indicates that most Boards of
Directors are linking executive pay to financial performance, when pay is
measured by its realizable value,” said Ira Kay, global director of
compensation consulting at Watson Wyatt and one of the nation’s leading
authorities on executive pay. “Executives who deliver above-average
performance are earning significantly more than those who don’t deliver.
And many executives are losing great amounts of wealth when their companies
perform poorly. Both are shareholder-friendly outcomes.”

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.

The study also found a large reduction in the value of stock-based
compensation programs, as the estimated grant value per employee declined
by roughly one-third between 2004 and 2006. Additionally, the rate by which
workers forfeited stock options increased nearly 20 percent last year, from
4.7 percent to 5.6 percent.

“While some options are forfeited because they expire with no value, an
increase in forfeitures in a rising stock market suggests many employees
are forgoing large amount of intrinsic option value to take jobs at other
organizations,” said Kay. “Moreover, shutting out employees from stock
options has the potential to create morale and productivity issues,
particularly as executives continue to have higher realizable pay.

“Greater share ownership helps motivate executives and employees, while
aligning executive pay with performance and shareholders’ interests.
Companies can make that happen by offering programs that encourage
executives to increase their company stock ownership and including a
broad-based group of employees in their stock option incentive programs,”
Kay concluded.

Copies of the Watson Wyatt 2007/2008 Report on Executive Pay are available
at www.watsonwyatt.com/execpay.

About Watson Wyatt Worldwide

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 7,000 associates in 31
countries and is located on the Web at www.watsonwyatt.com.