CEO compensation starting to match performance: study

Investors are never happy when a company they are invested in underperforms; but they are down right livid when they see the CEO of that same company rewarded with a hefty bonus and stock options. Based on the latest Watson Wyatt Worldwide S&P/TSX CEO Pay Study it seems corporations are finally getting the message.

According to the study, companies steered by CEOs who earned above-median increases in their total cash compensation (base salary, plus bonus) delivered shareholders a median total return of 19.4%. Meanwhile, companies whose CEO’s didn’t see their salaries increase as quickly in 2005 returned just 8.6%.

Still, the study concludes that “executive pay is at a crossroads.” So far large-cap companies have been much more responsive to disclosure of executive compensation than small- and mid-cap companies.

Overall, CEO compensation appears to be falling in line with performance. “The pay-for-performance philosophy is taking hold and companies are making strides in aligning CEO compensation to corporate performance,” says Ray Murrill of Watson Wyatt’s Human Capital Group.

High-performing CEOs were duly rewarded in 2004. They earned almost four-times more than low-performing CEO, and earned 31% more in 2004 than they did in 2003.

The survey also pointed out the importance of share ownership. Companies tend to outperform when their CEOs own stock — and the more the better. Company’s whose CEOs owned about $20 million or more returned 21.6% between 2003 and 2004 whereas CEOs who owned only about $1 million in stock returned 8.8%.

Between 2003 and 2004, the pay for telecommunications CEOs increased the fastest, up 14%, followed by heads of utilities and financial corporations, up 12% each over that period. In contrast, compensation of CEOs of consumer staples companies actually fell 11%.

Graham Dodd, national practice leader for Watson Wyatt, believes corporations will continue to improve in this area. “We believe corporate boards and directors will become even more diligent in their calls for pay-for-performance measures,” he said. “While it is evident from our study that compensation is being aligned with organizational performance, it is crucial for companies to review the effectiveness sand transparency of their compensation packages to ensure these arrangements deliver true pay-for-performance.”

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(11/30/05)