The Long-Run Performance of Firms Adopting Compensation Plans Based on Economic Profits

32 Pages Posted: 6 Jan 2000

See all articles by Chris E. Hogan

Chris E. Hogan

Michigan State University - Department of Accounting & Information Systems

Craig M. Lewis

Vanderbilt University - Finance

Date Written: October 1999

Abstract

Proponents of compensation plans based on economic profits argue that these plans control for deficiencies in stock-based or earnings-based bonus plans and thereby better align managers? and shareholders? interests. We examine whether compensation plans based on economic profits do in fact produce better investment decisions. We use a sample of 51 firms adopting economic profit plans between 1986 and 1994 to examine compensation, ownership, and governance structures, and long-run operating and stock price performance. While we document significant improvements in operating performance subsequent to adoption of the compensation plans, a sample of nonadopting matched firms shows similar significant improvements. There is no significant difference in the stock price performance of the two groups in the four-year period following an adoption. We conclude that economic profit plans are no better than traditional plans that provide a blend of earnings-based bonuses and stock-based compensation in terms of their ability to create shareholder wealth.

JEL Classification: J33, M41, G32

Suggested Citation

Hogan, Chris E. and Lewis, Craig M., The Long-Run Performance of Firms Adopting Compensation Plans Based on Economic Profits (October 1999). Available at SSRN: https://ssrn.com/abstract=191551 or http://dx.doi.org/10.2139/ssrn.191551

Chris E. Hogan (Contact Author)

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

Craig M. Lewis

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

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