Upfront: Exploring Options for CEO Compensation

As the stock market extended its rebound last year, the in-the-money value of CEOs' unexercised stock options more than doubled, from $12.8 million in 2003 to $29.1 million in 2004. That's from a Watson Wyatt Worldwide analysis of financial data at 63 large, publicly traded companies.

"Stock price appreciation -- not new stock option grants -- is clearly the key driver in the increase in the value of unexercised stock options," reports Ira Kay, New York City-based national director of compensation consulting with Watson Wyatt. "The growth in value masks a steady decline in the issuance of new stock option grants that was prompted by the forthcoming option expensing accounting rule.

"Moving forward, companies will be looking at new approaches to better link CEO pay with performance," Kay predicts. "We expect many companies to increase the amount of performance-based stock incentives, while others may increase stock ownership requirements. Whichever approach they take, the bottom line is to effectively link pay with performance while keeping executives motivated, engaged and excited."