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Business strategy, executive compensation and firm performance

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  • Yasheng Chen
  • Johnny Jermias

Abstract

type="main" xml:lang="en"> We investigate the impact of business strategy on the use of performance-linked compensation (PLC) and long-term incentive plans. We also examine the relation between strategy and compensation structure fit and performance. Using cluster and content analyses to classify a firm’s business strategy, we predict and find that product differentiation firms use a higher proportion of PLCs than cost-leadership firms. Furthermore, we find that the misfit between business strategy and compensation structure has a negative impact on performance. This study contributes to the executive compensation literature by recognizing that business strategy influences the compensation structure and that a strategy and compensation structure misfit negatively affects performance.

Suggested Citation

  • Yasheng Chen & Johnny Jermias, 2014. "Business strategy, executive compensation and firm performance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(1), pages 113-134, March.
    • Handle: RePEc:bla:acctfi:v:54:y:2014:i:1:p:113-134
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    File URL: http://hdl.handle.net/10.1111/j.1467-629X.2012.00498.x
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    2. Chih‐Wei Peng, 2020. "The role of business strategy and CEO compensation structure in driving corporate social responsibility: Linkage towards a sustainable development perspective," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(2), pages 1028-1039, March.
    3. Che Wan Jasimah Bt Wan Mohamed Radzi & Hashem Salarzadeh Jenatabadi & Maisarah Binti Hasbullah, 2015. "Firm Sustainability Performance Index Modeling," Sustainability, MDPI, vol. 7(12), pages 1-17, December.
    4. Rosalia Santulli, 2022. "“Fairness of CEO Compensation. A multi-faceted and multi-cultural framework to structure executive pay” by M.A. Eklund (Springer, 2019)," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 26(1), pages 315-325, March.
    5. Kong, Xiaowei & Jiang, Fan & Zhu, Ling, 2022. "Business strategy, corporate social responsibility, and within-firm pay gap," Economic Modelling, Elsevier, vol. 106(C).
    6. Yuan Yuan & Louise Yi Lu & Gaoliang Tian & Yangxin Yu, 2020. "Business Strategy and Corporate Social Responsibility," Journal of Business Ethics, Springer, vol. 162(2), pages 359-377, March.
    7. Veda Fatmy & John Kihn & Jukka Sihvonen & Sami Vähämaa, 2022. "Does lesbian and gay friendliness pay off? A new look at LGBT policies and firm performance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(1), pages 213-242, March.
    8. Xueyan Dong & Kam C. Chan & Yujia Cui & Jenny Xinjiao Guan, 2021. "Strategic deviance and cash holdings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(3-4), pages 742-782, March.
    9. Richard A. Schneible Jr & Neil Fargher, 2016. "Information transfer and firm-level strategy," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(4), pages 1119-1148, December.
    10. Mahmoud Al-Rdaydeh & Ammar Yaser Almansour & Mohammad Ahmad Al-Omari, 2018. "Moderating effect of competitive strategies on the relation between financial leverage and firm performance: evidence from Jordan," Business and Economic Horizons (BEH), Prague Development Center, vol. 14(3), pages 626-641, June.
    11. Lin, Yu-En & Li, Yi-Wen & Cheng, Teng Yuan & Lam, Keith, 2021. "Corporate social responsibility and investment efficiency: Does business strategy matter?," International Review of Financial Analysis, Elsevier, vol. 73(C).
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