The in-the-money value of unexercised stock options for chief executive officers soared during 2004 as the stock market continued its rebound, according to estimates prepared by Watson Wyatt, a leading human capital consulting firm.
In its first look at executive pay levels for 2004, Watson Wyatt analyzed stock option and financial data at 63 of the nationís largest publicly traded companies. The analysis found that the median in-the-money value of unexercised stock options from previous grants to CEOs more than doubled last year ó from $12.8 million in 2003 to $29.1 million in 2004.
Stock price appreciation ó not new stock option grants ó is clearly the key driver in the increase in the value of unexercised stock options, said Ira Kay, national director of compensation consulting at Watson Wyatt. The growth in value masks a steady decline in the issuance of new stock option grants that was prompted by the forthcoming option expensing accounting rule. Although the decline in new stock option grants has leveled off, it is unlikely that we will see another large increase in the value of unexercised stock options unless the stock market has a stellar year.
The analysis also found a correlation between how well a companyís stock performed ñ as measured by stock price appreciation ñ and executive pay. Among the high-performing companies in the analysis ñ as measured by stock price appreciation ñ the median value of unexercised stock options increased from $16.1 million in 2003 to $43.5 million in 2004. Among low-performing companies, the median value increased from $10.7 in 2003 to $15.3 million last year. The fact that the median value increased nearly 50 percent among low-performing companies reflects that stock options are highly leveraged and a small increase in stock price appreciation can lead to a large increase in value.
Moving forward, companies will be looking at new approaches to better link CEO pay with performance, said Kay. We expect many companies to increase the amount of performance-based stock incentives while others may increase stock ownership requirements. Whichever approach they take, the bottom line is to effectively link pay with performance while keeping executives motivated, engaged and excited.
Distributed by HRmarketer.com
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In the Money value of CEO stock options soared in 2004
The in-the-money value of unexercised stock options for chief executive officers soared during 2004 as the stock market continued its rebound
