Human Capital & Careers

Study: Pay for Performance Is Working

Since 2003, pay-for-performance has beaten out pay-for-opportunity schemes at "high-performing" companies.
Stephen TaubNovember 28, 2006

A new study from Watson Wyatt concluded that there is a direct link between CEO pay and their company’s performance. The compensation consultant found that executives at what it calls “financially high-performing” companies enjoy greater compensation than their counterparts at underperforming companies.

The conclusion suggests that the executive pay-for-performance model is working for most companies, said Watson Wyatt in a press release. Drilling down further through the data, the consultant found that CEOs at higher-performing companies have significantly greater “realizable” pay, especially from long-term incentive (LTI) awards. Realizable pay calculates the current value of outstanding LTI awards (typically, in-the-money stock options and performance share payouts) granted over a specific time frame using the ending stock price. Watson Wyatt used the 2003-to-2005 time frame for the study.

The company asserts that 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. In any case, 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. The consultant also noted that the median total return to shareholders at high performing companies was 32.3 percent, compared with just 9.8 percent for low performers.

The study is based on public data from 793 companies in the S&P Composite 1500.