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 www.watsonwyatt.com/payriskinsider

About Watson Wyatt

Watson Wyatt (NYSE, Nasdaq: 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 www.watsonwyatt.com.

SOURCE Watson Wyatt

CONTACT: Steve Arnoff of Watson Wyatt, +1-703-258-7634, steven.arnoff@watsonwyatt.com; or Ed Emerman for Watson Wyatt, +1-609-275-5162, eemerman@eaglepr.com