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Long-Term Incentive Payouts for CEOS

Chief executive officers whose companies financially outperformed their peers over a three-year period received long-term incentive award payouts that were more than 50% above their target, according to an analysis by global consulting firm, Watson Wyatt Worldwide. The firm’s analysis reveals that CEOs at high-performing companies — those with total returns to shareholders (TRS) above the median from 2004 to 2006 – were rewarded with long-term incentive payouts that were 156% of their targets. Conversely, CEOs at low-performing companies — those with a TRS below the median – received median payouts of just 71% of target. Overall, CEOs earned median payouts slightly above target at 114%. “The fact that high-performing companies rewarded their CEOs with above-target payouts shows a strong correlation between pay and performance,” says global director of compensation consulting, Ira Kay. “We believe that for the most part, strong company performance led to above target awards. While there may be a few cases of companies setting goals that were too easy to achieve, it’s clear that rewards play a crucial part in driving most CEOs to excel.” The analysis also finds that high-performing CEOs, as measured by one-year earnings per share (EPS) growth, received median annual incentive payouts that were 11% above target. However, CEOs at low-performing companies still received their target bonus payout. “With the SEC disclosure rules now in effect for the second year, performance goals for annual and long-term incentive plans are sure to attract more attention this proxy season. Although many companies are still deciding whether to disclose performance goals used in their executive pay programs, we expect companies will continue to focus on shareholder-friendly core pay elements. They will also continue to reinforce the link between pay and performance through increased transparency and difficult but attainable performance goals,” notes Kay.