February 04, 2002 >
Median pay for CEOs decreased to $1.3 million in 2000, down 32 percent from $1.9 million in the prior year, according to a new study from consultant Watson Wyatt.

Watson Wyatt said it expects the downward trend to continue when 2001 pay data is reported this spring, providing further evidence that there is a relationship between CEO pay and performance.

This would mark the first time in more than 15 years that CEO pay declined for two consecutive years.

The study examined pay levels of CEOs at more than 1,350 large, publicly traded companies. Nearly 75 percent of the CEOs who held the same positions in 1999 and 2000 had lower pay in 2000. A small minority of executives experienced huge gains in 2000 when they exercised options.

"For years we've been saying that there is a strong, positive correlation between company performance and executive pay levels, and during that time the stock market has been on a winning streak," said Ira Kay, Ph.D., national director of compensation consulting at Watson Wyatt and author of the study. "We now know that the relationship between CEO pay and performance holds true, even in a down market.

"Two years ago, we correctly predicted that while overall compensation opportunities for executives would continue to grow, actual payouts would decline if the stock market faltered. Given the lower financial performance of companies and the slumping stock market in 2001, we expect annual bonuses and stock option profits will again be much lower for 2001."

Kay believes that with lower share prices and many stock options still underwater, many executives had little or no gain last year and therefore exercised fewer options.

"Stock incentive opportunities, especially options, will also start to level off as investors raise concerns about excessive overhang," noted Kay. "But for companies that get their pay right, the returns could be excellent."

The study also found that shareholder returns were significantly higher in companies with higher levels of executive stock ownership. Companies with high CEO ownership provided a 20.7 percent return to shareholders at the end of 2000, while companies with low ownership levels saw no return to shareholders.

"Creating high executive stock ownership levels is essential. Executives with more stock ownership and greater opportunity to participate in stock appreciation through stock options have their interests aligned with those of the shareholders," said Kay.

In a companion Survey of Top Management Compensation, Watson Wyatt examined executive pay levels and recent trends in compensation at more than 1,700 companies. Among the findings:

· In 2001, 16 percent of all employees were eligible for stock options.

· The average grant value of stock options to CEOs increased to $4.3
million in 2001, from $4.0 million in the prior year.

· The percent of companies with stock ownership guidelines for senior management has leveled off in the past few years, at about 26 percent.

· Top management positions saw larger increases in total cash compensation (up 10.3 percent) than in base salaries in 2001 (up 6.2 percent), evidence that companies are placing greater emphasis on performance-based cash compensation.