Incentives and innovation: evidence from CEO compensation contracts
AbstractWe 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 InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 17/2011.
Length: 63 pages
Date of creation: 03 Oct 2011
Date of revision:
CEO compensation; innovation and incentives;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- O31 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-14 (All new papers)
- NEP-BEC-2011-11-14 (Business Economics)
- NEP-HRM-2011-11-14 (Human Capital & Human Resource Management)
- NEP-INO-2011-11-14 (Innovation)
- NEP-IPR-2011-11-14 (Intellectual Property Rights)
- NEP-LAB-2011-11-14 (Labour Economics)
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