Long-Term Incentive Plans and Firm Performance

Abstract: This essay will summarize and study existing theories and the recent developments regarding long-term incentive (LTI) plans in Swedish companies listed on Nasdaq OMX Stockholm. The underlying theory is the principal-agent problem that arises in public companies, which highlights the behavioural aspects of decision-making for employees in a managerial position. This study aims to provide evidence that LTI plans aimed at the executive management result in increased financial performance. The period to which the study relates is 2009 to 2012, analysing company profit from the year of implementation and three year forward. There is empirical evidence that increased profits can be associated with having an LTI plan in mid- and small-size companies, which indicates that the value of financial incentives is measureable. The data sample shows that shares are more prevalent in large companies and options in smaller companies. An analysis on the use of shares and options shows a correlation between instruments used and firm performance, which strengthens the implication of a potential LTI effect. Finally, there are further evidence that LTI have an impact on employee turnover but no evidence on an impact on leverage. This suggests that the use of financial incentives do to some extent retain managers but the level of risk measured in leverage is not quantifiable.