Financial incentives really do make CEOs perform better

Feb 21 2008 by Nic Paton Print This Article

If you want your company to be a high performer, you have to be prepared to provide the best financial incentives for those at the top, latest research has suggested.

The research by consultancy Watson Wyatt has added to a growing body of evidence suggesting that, rather than incentives leading to a culture of greed and stagnation, in fact there is a clear link between financial incentives at the top and high-performing organisations.

High-performing companies, it has argued, are generally led by the best paid and most financially motivated chief executives.

The Watson Wyatt study has concluded that CEOs whose companies financially outperformed their peers over a three-year period also received long-term incentive award payouts that were more than 50 per cent above their target.

The analysis follows a similar study published by the consultancy in December that argued that chief executives at high-performing companies earned significantly more "realisable" pay between 2004 and 2006, especially from long-term incentive (LTI) awards.

The latest analysis, which covered the same timeframe, showed that CEOs at high-performing companies – or those with total returns to shareholders (TRS) above the median – were rewarded with long-term incentive payouts that were 156 per cent of their targets.

Conversely, CEOs at low-performing companies – those with a TRS below average – received median payouts of just 71 per cent of target.

The analysis was based on CEOs at 177 companies who remained in their jobs for the three-year period and who received long-term performance share or cash awards.

But it did not include any stock options or restricted stock awards that the CEOs may have also received.

"The fact that high-performing companies rewarded their CEOs with above-target payouts shows a strong correlation between pay and performance," said Ira Kay, global director of compensation consulting at Watson Wyatt.

"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," she added.

The analysis also found that high-performing CEOs, as measured by one-year earnings per share (EPS) growth, received median annual incentive payouts that were 11 per cent above target.

However, CEOs at low-performing companies still received their target bonus payout, it added.