Exhibit 10.7

 

Watson Wyatt & Company

Performance Share Bonus Incentive Program

 

Summary

 

The Performance Share Bonus Incentive Program (the Program) is a long-term bonus
program for senior executives, designed to strengthen incentives and align
behaviors to grow the business in a way that is consistent with the strategic
goals of the Company.  Incentives are provided through grants of deferred stock
units tied to a 3-year performance period with vesting contingent upon meeting
certain Company goal thresholds.  This bonus program does not replace the Fiscal
Year End Bonus (FYEB).

 

Eligibility

 

Associates of Watson Wyatt & Company and its Affiliates will be eligible for
nomination to participate in the Program.  Eligible participants will be
nominated and approved by the Compensation Committee of the Board (the
Committee).  Generally, associates eligible for nomination will be high
performing, senior-level executives that have direct impact or responsibility
for driving strategy throughout the organization.

 

Performance Period

 

The performance period is a 3 year period that begins on July 1, 20xx and ends
on June 30, 20xx+3.  For example, the performance period that begins on July 1,
2004 will end on June 30, 2007.  Baseline metrics are established at the
beginning of the performance period.  At the end of the performance period,
performance metrics will then be measured.  The Company will follow its standard
process for financial reporting following the close of the fiscal year.  Once
Company financial results are finalized (August following end of fiscal year)
the final performance metric results for the most recent performance period can
be determined.

 

Grants

 

Grants of stock (performance shares) are made under the 2001 Deferred Stock Unit
Plan for Selected Employees.  Grants are based on the value of the cash portion
of the Fiscal Year End Bonus target.  A multiplier, which varies by
participation tier, is then applied to that value to determine the cash value of
the performance shares.  The cash value is then converted to a number of shares
of stock based on the stock market closing price on the last day of the fiscal
year prior to the grant.  For calculation purposes, band and salary

 

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information will be based on what is in effect as of October 1 of the first
fiscal year of the performance period.

 

All performance share grants will be made by the Committee at the beginning of
each performance period (following the fiscal year end close process).  Final
grant amounts will generally be determined by the method outlined here. 
However, the Committee, at its discretion, may adjust final grant amounts.

 

Vesting

 

The performance shares will vest 3 years from the date of grant based on the
achievement of certain performance metrics.  Company performance goals are
established by the Committee at the beginning of each performance period.  At
the conclusion of each performance period, Company performance metrics are
measured against goals over the same period to determine the percentage of the
grant to be awarded.  The actual award is determined by an earnout schedule
which defines performance level ranges and associated earnout of grants.  Vested
shares are distributed to participants in September following the end of the
performance period and the fiscal year end close.

 

Performance Metrics and Earnout

 

The final earnout for each performance period is determined by evaluating actual
Company performance, using pre-defined metrics, for the full 3-year performance
period.  Baselines for each metric will be established at the beginning of each
performance period by the Committee.  The baseline will be determined by
recording the metric as of the last day of the prior fiscal year (6/30).

 

There are two types of performance metrics:

1.               Financial metric

2.               Strategic metrics

 

The purpose of the financial metric is to ensure that the Company is meeting
fundamental business objectives while striving to achieve the Horizon goals. 
Financial metrics that may be used include EPS, NOI, Revenue, etc.

 

The strategic metrics are used to determine Company performance in a way that is
consistent with the Horizon strategy.  There are two strategic metrics and each
are plotted against each other to determine the award percentage within each
earnout schedule.  The intersection of the two results will determine the final
percentage of grant awarded to each participant.

 

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Earnout Schedules

 

Earnout schedules using minimum E.P.S Growth as the basic metric and Target
Market Penetration and Integration (cross-selling) as the performance metrics.

 

Earnout Schedule 1

 

Earnout Schedule 2

 

Earnout Schedule 3

 

 

 

 

 

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Earnout example for Performance Period 7/1/2004 – 6/30/2007

 

Metric

 

E.P.S. as of 6/30/2004

 

E.P.S. Growth for the
period 7/1/2004 -
6/30/2007

 

Percentage Used for
Earnout

E.P.S. Growth

 

$

1.54

 

+$.39 to $1.93 (25%)

 

Earnout Schedule 2

Penetration

 

34

%

37%

 

 

Integration

 

41

%

43%

 

90% Earnout

 

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Performance Metrics for Performance Period 7/1/2004 – 6/30/2007

 

Financial Metric

 

Earnings Per Share (E.P.S.) Growth – Annual E.P.S. for the fiscal year before
the start of the performance period compared to annual E.P.S. of the 3rd year of
the performance period, expressed as a percentage.  Annual E.P.S. is determined
by dividing total earnings by the number of shares outstanding.

 

Strategic Metrics

 

1.               Penetration – Percentage of target market companies (1,931 for
FY05) that are Watson Wyatt clients.  The performance period percentage will be
determined by using the target market list in effect for the last fiscal year of
the performance period.

 

2.               Integration – Percentage of target market clients (1,931 for
FY05) purchasing multiple (2 or more) lines of business with billings of at
least $50,000 per year for each practice.  The performance period percentage
will be determined using the target market list in effect for the last fiscal
year of the performance period.

 

Target market companies include the Fortune 1000, the P&I 1000 as well as other
companies deemed equivalent and approved by the Division Managers.  The target
market company list is developed at the end of each fiscal year for use during
the next fiscal year.  At least $50,000 in billings during the fiscal year is
required for a company to be counted as a client.

 

Termination Provisions

 

Participants whose employment terminates for reasons other than death,
disability or retirement will forfeit all future payouts.  Participants that
decease, become permanently disabled or retire may be eligible to receive an
earnout for each performance period for which shares have been granted, prorated
by service.  Prorated service will be based on the number of full months of
active employment during the performance period.  The Committee and CEO reserve
the right to evaluate and determine actual prorated payouts on a case by case
basis for Program participants.

 

Change in Control or Capitalization

 

A change in control or capitalization (merger, consolidation, reorganization,
stock split, acquisition, etc.) may affect the value of performance shares
granted, earnout of vested performance shares or other provisions of the
Program.  To assure fair and equitable treatment of participants in the event of
such a change in control or capitalization, the Committee, at its discretion,
may make changes to grants and/or vesting that is consistent

 

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with the Change in Control and Change in Capitalization provisions described in
the 2001 Deferred Stock Unit Plan for Selected Employees.

 

Under these circumstances, the Committee may make appropriate adjustments to the
number of performance shares granted for any performance period, accelerate the
vesting of any performance shares granted, or provide for payment in cash in
lieu of shares.

 

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