The Incentive Effects of Accounting Based Long‐Term Performance Plans

Long‐term performance contracts are awarded to top management in order to provide incentives to maximize shareholder value. We test the incentive hypothesis using 350 firms, one half of which has adopted long‐term performance plans over the period 1971–80. The analysis uses performance indicators such as earnings per share (EPS), rate of return on assets (ROA), rate of return on equity (ROE), rate of return on investment (ROI), and stock returns (ASR). In addition to using a control group of firms that did not adopt plans, the test period consists of a control period (six years prior to plan adoption) and a test period (six years following plan adoption). The results support the incentive hypothesis in that all performance indicators for the test firms improved compared to prior performance, but the performance of test firms in the period subsequent to plan adoption when compared to the control firms was not significantly different.