Executive pay and performance appears to be strongly linked, according to a study released today by Watson Wyatt Worldwide. Companies whose CEOs received high incentive-based compensation produced a 32.3% median annualized shareholder return for 2003 through 2005, compared with 9.8% at companies whose CEOs received low incentive awards, suggesting that "the U.S. executive pay model is working," the study said.
The "Realities of Executive Compensation" looked at data from 793 S&P 1500 index companies whose CEOs were in place between 2003 and 2005, said Emily Rieger, spokeswoman. The study examined "realizable" pay, or the amount CEOs earned and not necessarily received from long-term incentive awards such as stock-based incentive grants, which tend to be more sensitive to shareholder returns than total compensation, including cash and other forms of pay.
The median cumulative realizable long-term incentive compensation for CEOs at high-performing companies for 2003 through 2005 was $4.4 million, the study found. By contrast, the median cumulative realizable long-incentive compensation for CEOs at lower-performing companies for the same period was $1.5 million.
"Examining how much pay an executive can realize is an important step forward in measuring the sensitivity between actual pay and performance," Ira Kay, global director of executive compensation consulting at Watson Wyatt, said in a statement about the study. "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."