Performance-Based Long Term Incentive Compensation and Firm Performance

Abstract

Awarding executives long-term incentive pay based on firm performance is often described as a natural way to improve firm performance. This brief uses an analytical approach to examine that proposed relationship. We first document the prevalence of performance-based long-term incentive (PB LTI) measures and the trends in the relative size of these measures compared to aggregate measures of compensation. We then compare the characteristics and performance of firms that have implemented a PB LTI measure in the past to those that have not. In order to understand the impact of PB LTI awards on firm performance, we separately assess the roles of the existence of the PB LTI measures, the relative size of the measures, and the type of PB LTI measure on firm performance.