Booming markets triple value of CEO options

Mar 01 2007 by Nic Paton Print This Article

Not content with bumper pay rises and soaring bonuses, some American chief executives also saw the value of their stock options more than triple last year, thanks to the booming stock market.

A study by consultancy Watson Wyatt has found U.S chief executives across the board, but particularly those at higher performing companies, saw considerable increases in the value of their unexercised stock options last year.

The finding comes against a background of rising concern about CEO remuneration and compensation, with even President Bush criticising the excessive salaries and bonuses of some corporate bosses.

Last month, a study by the Economic Research Institute and the Wall Street Journal's executive careers' website reporting that top U.S executives saw their salaries and bonuses rises by nearly a third last year.

The average 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, said Watson Wyatt.

Even CEOs at lower-performing companies experienced a 5 per cent increase, from $19.7 million in 2005 to $20.6 million last year.

Company performance, based on total returns to shareholders (TRS), at higher-performing companies was on average up a quarter last year, compared with 7 per cent at lower-performing firms, it added.

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.

But Watson Wyatt stressed, while this was a significant increase, it still represented considerably less than 1 per cent of the $500 billion increase in market value experienced by the 100 large publicly traded companies in the study.

"Given the stock market's strong performance last year, it is not surprising that the unrealised gains on stock options soared, especially for CEOs at the best-performing companies," said 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," she added.

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

"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," added Kay.