**Exhibit 10.7**

 

**Watson Wyatt & Company**

**Performance Share Bonus Incentive Program**

 

Summary

 

The Performance Share Bonus Incentive Program (the Program) is a long-termbonus program for senior executives, designed to strengthen incentives andalign behaviors to grow the business in a way that is consistent with thestrategic goals of the Company. Incentives are provided through grants of deferred stock units tied to a3-year performance period with vesting contingent upon meeting certain Companygoal thresholds.  This bonus program doesnot replace the Fiscal Year End Bonus (FYEB).

 

Eligibility

 

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

 

Performance Period

 

The performance period is a 3 year period that begins on July 1, 20xxand ends on June 30, 20xx+3.  Forexample, the performance period that begins on July 1, 2004 will end on June30, 2007.  Baseline metrics areestablished 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 reportingfollowing the close of the fiscal year. Once Company financial results are finalized (August following end offiscal year) the final performance metric results for the most recentperformance period can be determined.

 

Grants

 

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

 

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

 

All performance share grants will be made by the Committee at thebeginning of each performance period (following the fiscal year end closeprocess).  Final grant amounts willgenerally 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 basedon the achievement of certain performance metrics.  Company performance goals are established bythe 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 todetermine the percentage of the grant to be awarded.  The actual award is determined by an earnout schedulewhich defines performance level ranges and associated earnout of grants.  Vested shares are distributed to participantsin September following the end of the performance period and the fiscal yearend close.

 

Performance Metrics and Earnout

 

The final earnout for each performance period is determined byevaluating actual Company performance, using pre-defined metrics, for the full3-year performance period.  Baselines foreach metric will be established at the beginning of each performance period bythe Committee.  The baseline will bedetermined 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 whilestriving to achieve the Horizon goals.  Financialmetrics that may be used include EPS, NOI, Revenue, etc.

 

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

 

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*Earnout Schedules*

 

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

 
| **Earnout Schedule 1** |   | **Earnout Schedule 2** |   | **Earnout Schedule 3** |
|------------------------|--------|------------------------|--------|------------------------|
|                   |   |                   |   |                   |
|                        |   |                        |   |                        |

 

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 Period7/1/2004 – 6/30/2007*

 

**Financial Metric**

 

Earnings Per Share (E.P.S.) Growth – AnnualE.P.S. for the fiscal year before the start of the performance period comparedto annual E.P.S. of the 3rd year of the performance period, expressed as apercentage.  Annual E.P.S. is determinedby dividing total earnings by the number of shares outstanding.

 

**Strategic Metrics**

 

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

 

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

 

Target market companies include the Fortune 1000, the P&I 1000 aswell as other companies deemed equivalent and approved by the DivisionManagers.  The target market company listis developed at the end of each fiscal year for use during the next fiscalyear.  At least $50,000 in billingsduring 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 permanentlydisabled or retire may be eligible to receive an earnout for each performanceperiod for which shares have been granted, prorated by service.  Prorated service will be based on the numberof full months of active employment during the performance period.  The Committee and CEO reserve the right toevaluate and determine actual prorated payouts on a case by case basis for Programparticipants.

 

Change in Control or Capitalization 

 

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

 

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with the Change in Control and Change inCapitalization provisions described in the 2001 Deferred Stock Unit Plan forSelected Employees.

 

Under these circumstances, the Committee may make appropriateadjustments to the number of performance shares granted for any performanceperiod, accelerate the vesting of any performance shares granted, or providefor payment in cash in lieu of shares.

 

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