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Incentives and innovation: evidence from CEO compensation contracts

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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.

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Bibliographic Info

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

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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/
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Keywords: CEO compensation; innovation and incentives;

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References

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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.

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