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Long-term incentives fail executives and shareholders

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Long-term incentives are failing to meet the needs of both executives and shareholders according to research by PricewaterhouseCoopers (PwC).

The report, Executive Compensation Review of the Year 2006, compares how different types of long-term incentive plans align executive pay with returns delivered to shareholders.

Tom Gosling, executive compensation partner at PwC, said: “The wealth of new rules and guidelines mean companies are faced with the increasingly delicate task of creating an incentive package that is aligned with shareholder value, while retaining and motivating executives.

“The frequency with which companies re-design their executive reward programmes, with long-term incentives posing a particular problem, testifies to the difficulty of getting them right.

“Fuelling this issue are new accounting rules, changes to pensions tax legislation the emergence of the pensions regulator and the current governance environment. Ironically, while all have been established to aid rather than thwart companies’ efforts, these and other factors have lead to incentive programmes that do not meet the needs of either shareholders or executives.”

The report argues that some of the assumptions on which executive reward packages are based need to be challenged if consistency and durability in long-term rewards are to be achieved.

Part of the problem is that long-term rewards are undervalued, partly because of “woeful under-investment” in communicating them.

But the report also says that the difficulty with most executive packages is that they reward for the organisation’s current prospects, not its future. It suggests one approach to combating this might be to consider long-term stock ownership by executives.

This would mean that part of an executive’s pay or bonus would be delivered as shares, to be held for a number of years.

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