Incentives and innovation : evidence from CEO compensation contracts
Francis, Bill; Hasan, Iftekhar; Sharma, Zenu (05.06.2011)
Numero
17/2011Julkaisija
Bank of Finland
2011
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-20140807365Tiivistelmä
We investigate the relationship between chief executive officer (CEO) compensation and innovation. In an empirical examination of compensation contracts of S&P 400, 500, and 600 firms we find that long-term incentives in the form of options are positively related to patents and citations to patents. In addition, convexity of options has a positive effect on innovation. We also find no relationship between pay for performance sensitivity (PPS) with patents and citations to patents while we did discover a positive relationship between these and golden parachutes. Finally, we show that subsequent to project failure managers compensation contracts are reset favourably. We provide support for the theory that compensation contracts that offer long-term commitment and protection from failure are more suitable for innovation