31 Pages Posted: 16 Aug 2011
Date Written: August 15, 2011
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.
Keywords: long-term incentives, bonuses, performance targets, performance evaluations, key performance indicators, uncertainty
Suggested Citation: Suggested Citation
Choi, Byung Hyun and Kim, Simon Jonghwan and Lee, Kyung Tae and Merchant, Kenneth A., The Design and Effects of a Long-Term Performance Plan (August 15, 2011). AAA 2012 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1910433 or http://dx.doi.org/10.2139/ssrn.1910433
By Kevin Murphy