CEO pay more accountable

Companies that pay out bonuses to their CEOs enjoy a significantly higher company performance: study

Pay-for-performance at the executive level is taking hold, with companies making strong links between company performance and CEO total cash compensation, according to a Watson Wyatt study released last month.

The study looked at CEO pay for more than 200 companies listed in the Standard & Poor’s/Toronto Stock Exchange Composite Index.

Those companies that paid out bonuses to their CEOs enjoyed a significantly higher company performance: 15.6-per-cent three-year annualized total return to shareholders (TRS) (compared to 10.4 per cent for those with no bonuses) and 16-per-cent one-year TRS (compared to minus-8.5 per cent). Those with above-median increases in total cash compensation saw 19.4-per-cent TRS, compared to 8.6 per cent TRS for the below-median group.

The results indicate companies understand that the key to making executive pay work is to set high but achievable performance goals and then reward those who meet them, said Graham Dodd, national practice leader, human capital group, Watson Wyatt. “The ‘malaise’ around pay-for-performance is linked to executives who fail to increase shareholder value, and who are still rewarded with rich compensation packages.”

The study also found CEO base pay increased by six per cent at the mean from 2003 to 2004, annual incentives by eight per cent and total compensation by 11 per cent. Average increases were nine-per-cent for base salary, 44 per cent for annual incentives, and 28 per cent for total compensation.

On average, the CEOs in the companies surveyed received $692,000 in base pay, $896,000 in annual incentives, and long-term incentive grants valued at $2,328,000 — for a total of $3,180,000.

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