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Effects of executive compensation incentive on R%D investments: a behavioural study of corporate governance based on Taiwanese firms

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  • Weining Liu
  • Hsiuling Wen

Abstract

From the perspective of corporate governance, the compensation scheme directly motivates executive behaviour, and corporate governance importantly affects the innovative capacity of a firm. Stock-based pay is a powerful tool with which to link an executive's compensation to a company's long-term profitability. However, a question remains regarding whether stock-based pay and cash compensation have different effects on an executive's behaviour in the formulation of firm strategies, particularly those regarding R%D investments. Therefore, this investigation uses two moderating variables, firm risk and board composition to study their moderation of the correlation between executive compensation and the behaviour of executives in making corporate R%D investments. We find stock compensation is more likely to promote innovation in high-risk firms, whereas cash compensation is more likely to do so in low-risk firms. Additionally, in firms with a relatively high outsider board representation, stock-based compensation motivates executives to take innovation risks to justify their pay.

Suggested Citation

  • Weining Liu & Hsiuling Wen, 2013. "Effects of executive compensation incentive on R%D investments: a behavioural study of corporate governance based on Taiwanese firms," International Journal of Corporate Governance, Inderscience Enterprises Ltd, vol. 4(3), pages 260-276.
    • Handle: RePEc:ids:ijcgov:v:4:y:2013:i:3:p:260-276
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