The Design and Effects of a Long-Term Performance Plan

31 Pages Posted: 16 Aug 2011  

Byung Hyun Choi

LG Economic Research Institute

Simon Jonghwan Kim

Alliance Manchester Business School

Kyung Tae Lee

School of Business, Yonsei University

Kenneth A. Merchant

University of Southern California - Leventhal School of Accounting

Date Written: August 15, 2011

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.

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

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

Byung Hyun Choi

LG Economic Research Institute ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States
714-515-0939 (Phone)

Jonghwan Kim (Contact Author)

Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Kyung Tae Lee

School of Business, Yonsei University ( email )

Korea
821022050912 (Phone)

Kenneth A. Merchant

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-4842 (Phone)
213-747-2815 (Fax)

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