The Impact of Performance Plan Adoption on Value Added and Earnings

Theoretical arguments have indicated that long‐term accounting‐based performance plans motivate executives to improve long‐run firm performance (Smith and Watts, 1982; Larcker, 1983). Following conflicting empirical evidence related to the stock market reaction associated with the adoption of accounting‐based long‐run performance plans, this study seeks to gain further insight into the effect of such plans on accounting income‐based and value added‐based measures of productivity and return. The results indicate that firms adopting accounting‐based performance plans do not experience any greater gains in accounting return or productivity measures than do a set of control firms. Thus, such plans may not have the intended effect. Because performance plans are a popular method of executive incentive compensation, further research on the impact of these plans is indicated.