The Effect of Incentive Compensation Plans on Operating Performance and Shareholder Wealth: Evidence from Taiwanese Electronic Industry

This paper examines the effect of incentive compensation plans of Taiwanese electronic companies on their operating performance and stock return. The results show that the employee bonus ratio measured by fair value has a positive incentive effect on subsequent operating performance before adjusting the expenses of employee bonus. But, after considering the expenses of employee bonus to adjust operating performance, the results show that greater bonus ratio do not create better subsequent adjusted operating performance. These results may be caused by excessive profit-sharing before the revising of accounting treatment for employee bonus. We also find the same results about subsequent stock return that it links the shareholder wealth. In addition, the results fail to support the hypothesis that the greater the proportion of the stock bonus the better the subsequent operating performance and stock return. Our findings provide some evidences to support the amendment in the accounting rules for employee bonus to reflect the compensation cost.