Advanced Search
MyIDEAS: Login

Incentives and innovation: evidence from CEO compensation contracts

Contents:

Author Info

  • Francis, Bill

    (Lally School of Management, Rensselaer Polytechnic Institute)

  • Hasan, Iftekhar

    () (Lally School of Management, Rensselaer Polytechnic Institute, and Bank of Finland)

  • Sharma, Zenu

    (Long Island University)

Abstract

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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1117.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 17/2011.

as in new window
Length: 63 pages
Date of creation: 03 Oct 2011
Date of revision:
Handle: RePEc:hhs:bofrdp:2011_017

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
More information through EDIRC

Related research

Keywords: CEO compensation; innovation and incentives;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Agrawal, Anup & Mandelker, Gershon N, 1987. " Managerial Incentives and Corporate Investment and Financing Decision s," Journal of Finance, American Finance Association, vol. 42(4), pages 823-37, September.
  2. Drew Fudenberg & Bengt Holmstrom & Paul Milgrom, 1987. "Short-Term Contracts and Long-Term Agency Relationships," Working papers 468, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Aghion, Philippe & Van Reenen, John & Zingales, Luigi, 2009. "Innovation and Institutional Ownership," CEPR Discussion Papers 7195, C.E.P.R. Discussion Papers.
  4. Paul Oyer, 2004. "Why Do Firms Use Incentives That Have No Incentive Effects?," Journal of Finance, American Finance Association, vol. 59(4), pages 1619-1650, 08.
  5. Hall, B. & Jaffe, A. & Trajtenberg, M., 2001. "The NBER Patent Citations Data File: Lessons, Insights and Methodological Tools," Papers 2001-29, Tel Aviv.
  6. Garvey, Gerald T. & Milbourn, Todd T., 2006. "Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad," Journal of Financial Economics, Elsevier, vol. 82(1), pages 197-225, October.
  7. Bizjak, John M. & Lemmon, Michael L. & Naveen, Lalitha, 2008. "Does the use of peer groups contribute to higher pay and less efficient compensation?," Journal of Financial Economics, Elsevier, vol. 90(2), pages 152-168, November.
  8. Dirk Bergemann & Ulrich Hege, 2001. "The Financing of Innovation: Learning and Stopping," Cowles Foundation Discussion Papers 1292, Cowles Foundation for Research in Economics, Yale University.
  9. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance And Equity Prices," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 107-155, February.
  10. Ellie G. Harris, 1990. "Antitakeover Measures, Golden Parachutes, and Target Firm Shareholder Welfare," RAND Journal of Economics, The RAND Corporation, vol. 21(4), pages 614-625, Winter.
  11. Bronwyn H. Hall & Adam Jaffe & Manuel Trajtenberg, 2005. "Market Value and Patent Citations," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 16-38, Spring.
  12. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February.
  13. Aghion, P. & Tirole, J., 1993. "On the Management of Innovation," Working papers 93-12, Massachusetts Institute of Technology (MIT), Department of Economics.
  14. Jie Cai & Anand M. Vijh, 2007. "Incentive Effects of Stock and Option Holdings of Target and Acquirer CEOs," Journal of Finance, American Finance Association, vol. 62(4), pages 1891-1933, 08.
  15. Lambert, Richard A. & Larcker, David F., 1985. "Golden parachutes, executive decision-making, and shareholder wealth," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 179-203, April.
  16. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are Ceos Rewarded For Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 901-932, August.
  17. Aghion, Philippe & Tirole, Jean, 1994. "The Management of Innovation," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1185-1209, November.
  18. Menachem Brenner & Rangarajan K. Sundaram & David Yermack, 1998. "Altering the Terms of Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-010, New York University, Leonard N. Stern School of Business-.
  19. Francis, Jennifer & Smith, Abbie, 1995. "Agency costs and innovation some empirical evidence," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 383-409, April.
  20. Sok-Hyon Kang & Praveen Kumar & Hyunkoo Lee, 2006. "Agency and Corporate Investment: The Role of Executive Compensation and Corporate Governance," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1127-1148, May.
  21. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 653-691, August.
  22. Brian J. Hall, 1999. "The Design Of Multi-Year Stock Option Plans," Journal of Applied Corporate Finance, Morgan Stanley, vol. 12(2), pages 97-106.
  23. Heron, Randall A. & Lie, Erik, 2007. "Does backdating explain the stock price pattern around executive stock option grants?," Journal of Financial Economics, Elsevier, vol. 83(2), pages 271-295, February.
  24. Rosen, Sherwin, 1985. "Commentary on `golden parachutes, executive decision-making, and shareholder wealth'," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 205-208, April.
  25. Lefanowicz, Craig E. & Robinson, John R. & Smith, Reed, 2000. "Golden parachutes and managerial incentives in corporate acquisitions: evidence from the 1980s and 1990s," Journal of Corporate Finance, Elsevier, vol. 6(2), pages 215-239, July.
  26. Haugen, Robert A & Senbet, Lemma W, 1981. "Resolving the Agency Problems of External Capital through Options," Journal of Finance, American Finance Association, vol. 36(3), pages 629-47, June.
  27. John Core, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, 06.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Paloviita, Maritta & Kinnunen, Helvi, 2011. "Real time analysis of euro area fiscal policies: adjustment to the crisis," Research Discussion Papers 21/2011, Bank of Finland.
  2. Claire Bonnard, 2011. "Les incitations à l'innovation dans le secteur privé," Post-Print halshs-00599700, HAL.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hhs:bofrdp:2011_017

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.