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Align Executive Pay And Long Term Performance


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ALIGN EXECUTIVE PAY AND LONG-TERM PERFORMANCE

Your editorial "Executive pay: Who gets shortchanged" (May 30) said: "You know the drill: slash research and development, postpone badly needed investments, and eliminate employees. The stock shoots up, at least in the short term." It's worth noting that this approach is not reflected in the actual historical performance of the market.

Evidence shows that the market does not penalize companies for increasing R&D and capital investments. In fact, companies are often rewarded for investments in long-term value creation.

A 1985 study published by the office of the chief economist at the Securities & Exchange Commission showed that increases in R&D expenditures have resulted in superior share price returns. Similarly, a 1985 study of capital expenditures covering 285 companies shows that the market reacted favorably to spending increases and unfavorably to spending decreases. Despite the imperfections, share-based long-term incentives remain the best way to align executive pay and company performance.

Charles McKhann

Strategic Compensation Associates

London


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