Debunking Executive Compensation Myths

Published on: Thursday, January 31, 2008       Comments (0)       Category: Finance,  Leadership,  Reality Check, 

The financial pages are regularly riddled with news of big CEO payouts, but research from Watson Wyatt seeks to dispel some of the negativity. In their 2007/2008 report, Debunking Executive Compensation Myths, the financial services consulting company draws a correlation between the compensation of high-performing companies and their lower performing brethren, with CEOs of better performing organizations earning up to 75 percent more ($10.5 million compared to $6.0 million).

In addition to the higher total direct compensation, CEOs of high-performing companies saw their paychecks sweetened with another $5.2 million in realizable long-term incentives, while CEOs of companies that delivered lower total returns to shareholders garnered just an additional $1.7 million. The report says, “These results show the sensitivity between actual pay and performance inherent in the executive pay model and that CEOs who do not achieve strong performance do not earn their full opportunity.”

ExecuNet’s ongoing executive compensation analysis recognized the trend to link pay to performance in the last few years. According to ExecuNet surveys, corporate recruiters reported that 84 percent of executives were being offered performance bonuses in 2006, compared to just 50 percent in 2005. And search firm professionals were also negotiating performance reviews after six months for 44 percent of their executive placements, nearly doubling since 2005.

The Conference Board also recently weighed in on CEO compensation, finding that chief executives have common financial interests with their shareholders. CEOs who have “skin in the game,” according to The Conference Board, “have a link between their own wealth and the stock price performance of the company, providing financial incentives (beyond current compensation) to guide their company toward positive performance.”