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Strong Link Between Pay and Performance - Harris Search Associates
Executive Insights   Strong Link Between Pay and Performance

Watson Wyatt Study Suggests Strong Link Between CEO Pay and Performance

Executives at financially high-performing companies are realizing greater compensation than their counterparts at under-performing companies, suggesting that corporate America's executive pay-for-performance model is working for most companies.

Further, CEOs at higher-performing companies have significantly greater ''realizable'' pay, especially from long-term incentive (LTI) awards, according to a recent study by Watson Wyatt Worldwide, a global consulting firm.

Realizable pay calculates the current value of outstanding LTI awards (typically, in-the-money stock options and performance share payouts) granted over a specific timeframe using an ending stock price for a set period of management performance appraisal. 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, according to 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.

''Examining how much pay an executive can realize is an important step forward in measuring the sensitivity between actual pay and performance,'' says 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.''


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