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February 27, 2007
CEOs See Big Gains in Value of Stock Options

Chief executive officers at higher-performing companies saw big gains in the value of their unexercised stock options last year, according to an analysis by Watson Wyatt, a consulting firm.

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The firm found that the median in-the-money value of unexercised stock options for CEOs at higher-performing companies more than tripled last year, from $13.8 million in 2005 to $42.6 million.

At the same time, CEOs at lower-performing companies experienced a 5 percent increase, from $19.7 million in 2005 to $20.6 million last year.

Company performance is based on total returns to shareholders (TRS); at higher-performing companies, TRS averaged 25 percent last year, compared with 7 percent at lower-performing firms.

Overall, the median in-the-money value of unexercised stock options for all CEOs in the analysis increased 47 percent, to $28 million, in 2006. The total net increase for the CEOs was nearly $2 billion.

"Given the stock market's strong performance last year, it is not surprising that the unrealized gains on stock options soared, especially for CEOs at the best-performing companies," says Ira Kay, global director of compensation consulting at Watson Wyatt. "While the appropriate level of executive rewards is open to debate, it is clear that the greatest gains are going to those whose companies are performing best. This shows that the pay- for-performance model is working at most companies."

Overall, the level of stock option gains is due in large part to the stock market's strong performance, the firm notes. Only 14 of the 100 companies in the analysis had negative TRS last year.

"This year's proxy season should show another year where pay levels reflect strong corporate performance," Kay says. "In addition, with new executive pay disclosure rules taking effect, we will likely see a number of changes to executive pay programs as companies continue to try to motivate and engage executives while ensuring that the link between pay and performance satisfies shareholders."

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