Are long-term incentive plans an effective and efficient way of motivating senior executives?

Abstract

Research on senior executive reward has typically explored the connection between pay, performance and the alignment of interests of executives and shareholders. This article examines the relationship between reward and motivation, drawing on the psychological, behavioural economics and decision-making literatures. Based on an empirical study of FTSE 350 senior executives, the research examines whether long-term incentive plans are an effective and efficient way of motivating executives, taking into account risk, time discounting, uncertainty and fairness. The article concludes that the way executives frame choices, perceive value, assess probability, evaluate temporal effects and respond to uncertainty means that long-term incentive plans (LTIPs) are generally not efficient and are often not effective in meeting their objectives. It proposes that, in its current form, agency theory does not provide a sound basis for modelling senior executive reward, and suggests five areas for development. © 2011 Blackwell Publishing Ltd.