CEO compensation and strategic expenses: penalizing, shielding or rewarding?
Purpose – The purpose of this paper is to investigate the way in which CEOs are shielded or rewarded for incurring R&D expenses. Strategic expenses such as R&D yield returns over a long period of time even though GAAP requires them to be written off in the period they are incurred. Going beyond the existing shielding paradigm, the paper investigates whether compensation committees actively reward CEOs for incurring strategic expenses. Design/methodology/approach – The paper uses empirical analysis by using regression analysis with CEO compensation (both cash and equity) as the dependent variable and firm size, firm performance, earnings risk, market-to-book ratio, R&D expenses, advertising expenses and governance variables as control, independent and test variables. Findings – The paper shows that CEOs are not only shielded but are actively rewarded for incurring R&D expenses. The paper also shows that the shield/reward effects are stronger in manufacturing firms. Finally, the paper shows that independent compensation committees increase rewards for R&D expenses. Research limitations/implications – Given the small sample of firms with advertising expense data, a larger sample, possibly using hand-collected data will be required to arrive at definitive conclusions regarding shielding/rewarding for advertising. Furthermore, the shielding of both R&D and advertising expenses should be looked at in conjunction with the duration of the persistence of benefits of such strategic expenses. Originality/value – This paper shows how compensation committees can use compensation to induce executives to undertake strategic expenses on behalf of the firm.
Volume (Year): 11 (2012)
Issue (Month): 3 ()
|Contact details of provider:|| Web page: http://www.emeraldinsight.com|
|Order Information:|| Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK|
Web: http://emeraldgrouppublishing.com/products/journals/journals.htm?id=raf Email:
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.:
- Hermalin, Benjamin E & Weisbach, Michael S, 1998.
"Endogenously Chosen Boards of Directors and Their Monitoring of the CEO,"
American Economic Review,
American Economic Association, vol. 88(1), pages 96-118, March.
- Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Microeconomics 9602001, EconWPA, revised 09 Oct 1996.
- Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers _004, University of California at Berkeley, Haas School of Business.
- Gary K. Meek & Ramesh P. Rao & Christopher J. Skousen, 2007. "Evidence on factors affecting the relationship between CEO stock option compensation and earnings management," Review of Accounting and Finance, Emerald Group Publishing, vol. 6(3), pages 304-323, August.
- Yuan Ding & Hervé Stolowy & Michel Tenenhaus, 2007. "R&D productivity: an exploratory international study," Review of Accounting and Finance, Emerald Group Publishing, vol. 6(1), pages 86-101, February.
- John E. Core & Wayne R. Guay & David F. Larcker, 2003. "Executive equity compensation and incentives: a survey," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 27-50.
- Bebchuk, Lucian Arye & Fried, Jesse & Walker, David I, 2002.
"Managerial Power and Rent Extraction in the Design of Executive Compensation,"
CEPR Discussion Papers
3558, C.E.P.R. Discussion Papers.
- Lucian Arye Bebchuk & Jesse M. Fried & David I. Walker, 2002. "Managerial Power and Rent Extraction in the Design of Executive Compensation," NBER Working Papers 9068, National Bureau of Economic Research, Inc.
- Lambert, Richard A., 1993. "The use of accounting and security price measures of performance in managerial compensation contracts: A discussion," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 101-123, April.
- Wu, Jianfeng & Tu, Rungting, 2007. "CEO stock option pay and R&D spending: a behavioral agency explanation," Journal of Business Research, Elsevier, vol. 60(5), pages 482-492, May.
- Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
- Balsam, Steven & Fernando, Guy D. & Tripathy, Arindam, 2011. "The impact of firm strategy on performance measures used in executive compensation," Journal of Business Research, Elsevier, vol. 64(2), pages 187-193, February.
- Low, Angie, 2009. "Managerial risk-taking behavior and equity-based compensation," Journal of Financial Economics, Elsevier, vol. 92(3), pages 470-490, June.
- Sharad C. Asthana & Yinqi Zhang, 2006. "Effect of R&D investments on persistence of abnormal earnings," Review of Accounting and Finance, Emerald Group Publishing, vol. 5(2), pages 124-139, May.
- Hanlon, Michelle & Rajgopal, Shivaram & Shevlin, Terry, 2003. "Are executive stock options associated with future earnings?," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 3-43, December.
When requesting a correction, please mention this item's handle: RePEc:eme:rafpps:v:11:y:2012:i:3:p:279-297. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Louise Lister)
If references are entirely missing, you can add them using this form.