Pay-performance link works, study finds

The value of CEOs’ stock ownership in their own companies and their outstanding equity awards and bonus payouts fell 42% on average in 2008, larger than the median 34% decline experienced by a typical shareholder at those companies, according to a study released today by Watson Wyatt Worldwide, a consulting firm.

The 967 CEOs analyzed in the study about their company stock lost a combined $53.7 billion on that stock — roughly $55.5 million for the average CEO — in 2008, compared with $3.2 trillion for shareholders of the same set of companies, the study said.

The stock market recovery this year has mitigated some of those losses, the study said.

The study is based on public data from 982 companies in the Standard & Poor’s 1500 that filed proxies before July 2009. Not all the companies were analyzed on all the data points.

“Overall, we find that the executive compensation architecture at most firms does not encourage excessive risk taking,” said the Watson Wyatt “2009/2010 Report on Executive Pay: Moving Beyond the Financial Crisis.”

“Companies with an executive compensation architecture that creates a strong link between CEO wealth and risk had lower realizable total direct compensation and superior total returns to shareholders than companies with a weaker link to risk reduction,” the 20-page report said.

“Even under extreme circumstances (of the market in the last two years), we found that the executive pay-for-performance model is working as intended,” Ira Kay, global director of executive compensation consulting at Watson Wyatt, said in a statement about the study.

“When the economy prospers and the stock market does well, executives reap the rewards. But when markets decline, executives also suffer financial setbacks,” Mr. Kay said in the statement. “The financial crisis and market downturn in 2008 bear this out.”