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

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  

  	
   

  	
  

  	
   

  	
  

  



 


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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