Watson Wyatt Analysis Contradicts Conventional Wisdom on Executive Pay Elements that Encourage Risk Taking
2009年6月5日 - 1:37AM
PRニュース・ワイアー (英語)
WASHINGTON, June 4 /PRNewswire-FirstCall/ -- Many elements of
corporate executive pay programs believed to cause excessive risk
taking actually encourage executives to reduce risk, according to
experts at Watson Wyatt, a leading global consulting firm. This
discovery comes as more pressure is being brought to bear on
companies to examine the impact of their pay programs on corporate
risk taking. "Many believe that executive pay played a substantial
role in the financial crisis by encouraging excessive risk taking.
As a result, public support has swelled for reforming and
regulating the basic executive pay model," said Ira Kay, global
director of executive compensation at Watson Wyatt. "However,
traditional methods for evaluating executive compensation risk do
not accurately gauge the true relationship between risk and pay."
Watson Wyatt evaluated the executive compensation architecture at
more than 1,000 firms and identified elements of executive pay
programs that encourage or discourage corporate risk taking.
Surprisingly, many of these contradict widely held beliefs,
including the common critique that high incentive levels encourage
reckless risk taking. Similarly, conventional wisdom would hold
that higher amounts of annual bonuses, long-term incentives (LTIs)
and stock options encourage excessive risk taking. However, the
Watson Wyatt analysis found that these actually encourage
executives to take less risk. In some instances, pay elements that
encourage more or less risk taking behavior conform to conventional
wisdom. High levels of stock ownership were associated with reduced
risk, and excessively high levels of pay opportunity encourage
taking more risk. To evaluate the potential risk, Watson Wyatt
employed in its correlations the Z-score, a widely used measure to
assess credit risk. Correlation of Executive Pay Elements With Risk
Taking Risk Aggravators Risk Neutral Risk Mitigators
---------------- ------------ --------------- Excessive pay Use of
earnings-based High proportion of LTI in opportunity metrics in
annual total direct compensation incentive plans Use of a number of
High levels of Use of market-based metrics performance metrics
nonqualified in annual incentive plans in annual incentive deferred
compensation (bonus) plans Use of return-based Longer vesting terms
High annual incentive metrics in annual (years) for LTIs leverage
incentive plans Higher proportion of options in LTI mix "Finding a
way to assess risk taking will have a significant impact on the
next generation of executive pay plans," said Kay. "Ultimately, the
companies that find the sweet spot between executive pay for
performance and rewarding proper risk management will be better
positioned to reward and motivate executives while delivering
higher long-term shareholder returns." For more information, visit
http://www.watsonwyatt.com/payriskinsider About Watson Wyatt Watson
Wyatt (NYSE:WWNASDAQ:WW) is the trusted business partner to the
world's leading organizations on people and financial issues. The
firm's global services include: managing the cost and effectiveness
of employee benefit programs; developing attraction, retention and
reward strategies; advising pension plan sponsors and other
institutions on optimal investment strategies; providing strategic
and financial advice to insurance and financial services companies;
and delivering related technology, outsourcing and data services.
Watson Wyatt has 7,700 associates in 34 countries and is located on
the Web at http://www.watsonwyatt.com/. DATASOURCE: Watson Wyatt
CONTACT: Steve Arnoff of Watson Wyatt, +1-703-258-7634, ; or Ed
Emerman for Watson Wyatt, +1-609-275-5162, Web Site:
http://www.watsonwyatt.com/
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