The Design and Effects of a Long-Term Performance Plan

Abstract:     
We use data obtained from a large Korean conglomerate to explore the design and effects of a long-term performance plan (LTPP) and the short-term incentive plan (STIP) with which it is used. We found that the adoption of the LTTP did appear to lengthen managers’ decision making horizons, as the adoption of the plan was associated with subsequently larger capital, R&D and marketing investments. The payouts from the LTTP were significantly larger than those for the STIP. Most business units achieved their performance targets, but LTIP achievement levels were higher than those for the STIP because the financial targets were more achievable than those for the “key performance indicators” included in the STIP. Most of the contextual factors studied did not have significant effects on either the design or effects of the LTPP. However, larger business units tended to have higher performance and higher bonus payout multiples.

Number of Pages in PDF File: 31

Keywords: long-term incentives, bonuses, performance targets, performance evaluations, key performance indicators, uncertainty

working papers series