In-the-Money Value of CEO Stock Options Soared at Best-Performing Companies in 2005

CEOs at high-performing companies saw large gains in the value of their unexercised stock options last year, while those at poor-performing companies saw significant decreases, according to a new CEO pay analysis by Watson Wyatt.

In its first look at 2005 executive pay levels, Watson Wyatt found that the median in-the-money value of unexercised stock options for CEOs at high-performing companies soared by nearly 50 percent, while CEOs at weak-performing companies experienced a decline of more than 50 percent in the value of their unexercised stock options. The median in-the-money value of unexercised stock options for all CEOs in the analysis increased 12.3 percent, from $14.2 million in 2004 to $15.9 million in 2005. The total net increase for the CEOs was nearly $1 billion. The analysis was based on stock option and financial data at 95 of the nationís largest publicly traded companies.

ìUnrealized gains on stock options are one of the best indicators of pay-for-performance sensitivity,î said Ira Kay, global director of compensation consulting at Watson Wyatt. ìDespite the occasional anomaly, both shareholders and boards should be pleased by the strong correlation between an executiveís pay and how well ó or poorly ó a companyís stock performs.î

According to Watson Wyatt, among high-performing companies ó as measured by stock price appreciation ó the median value of unexercised stock options soared 47.3 percent, from $19.7 million in 2004 to $29.0 million in 2005. Among low-performing companies, the median value declined by more than half (51.6 percent), from $11.9 in 2004 to $5.7 million last year.

High-performing companies returned 24.5 percent to shareholders last year, while low-performing companies had a minus 3 percent total return to shareholders. The median value of unexercised stock options declined by more than 50 percent among low-performing companies because stock options are highly leveraged and a small decline in returns to shareholders can lead to a large decrease in option value.

ìAs companies continue to expense their stock options, we expect to see a growing number of companies embrace other forms of incentives for their executives, such as performance-based stock,î said Kay. ìAlthough the vehicles may change, the goal of keeping executives motivated and engaged while effectively tying their pay to performance is as important as ever.î

Distributed by HR Marketer.com