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Incentives and innovation : evidence from CEO compensation contracts

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  • Francis, Bill
  • Hasan, Iftekhar
  • Sharma, Zenu

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

Suggested Citation

  • Francis, Bill & Hasan, Iftekhar & Sharma, Zenu, 2011. "Incentives and innovation : evidence from CEO compensation contracts," Research Discussion Papers 17/2011, Bank of Finland.
    • Handle: RePEc:bof:bofrdp:2011_017
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    Cited by:

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    2. Diego d'Andria, 2016. "Taxation and Incentives to Innovate: A Principal-Agent Approach," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 72(1), pages 96-123, March.
    3. Honoré, Florence & Munari, Federico & van Pottelsberghe de La Potterie, Bruno, 2015. "Corporate governance practices and companies’ R&D intensity: Evidence from European countries," Research Policy, Elsevier, vol. 44(2), pages 533-543.
    4. Iftekhar Hasan & Steven Raymar & Liang Song, 2015. "Effects Of Corporate And Country Governance On R&D Investment: Evidence From Emerging Markets," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 60(01), pages 1-17.
    5. Chang, Xin & Fu, Kangkang & Low, Angie & Zhang, Wenrui, 2015. "Non-executive employee stock options and corporate innovation," Journal of Financial Economics, Elsevier, vol. 115(1), pages 168-188.
    6. Sadler, Evan, 2021. "Dead ends," Journal of Economic Theory, Elsevier, vol. 191(C).
    7. Alfredo M. Bobillo & J.A. Rodríguez‐Sanz & F. Tejerina‐Gaite, 2018. "Corporate governance drivers of firm innovation capacity," Review of International Economics, Wiley Blackwell, vol. 26(3), pages 721-741, August.
    8. Biggerstaff, Lee & Blank, Brian & Goldie, Brad, 2019. "Do incentives work? Option-based compensation and corporate innovation," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 415-430.
    9. Si, Deng-Kui & Wang, Yanan & Kong, Dongmin, 2020. "Employee incentives and energy firms’ innovation: Evidence from China," Energy, Elsevier, vol. 212(C).
    10. Christophe Pennetier & Karan Girotra & Jürgen Mihm, 2019. "R&D Spending: Dynamic or Persistent?," Manufacturing & Service Operations Management, INFORMS, vol. 21(3), pages 636-657, July.
    11. Lee, Gemma, 2020. "Does CEO inside debt promote corporate innovation?," Finance Research Letters, Elsevier, vol. 37(C).
    12. d'Andria, Diego & Uebelmesser, Silke, 2016. "The relationship between R&D intensity and profit-sharing schemes: evidence from Germany and the United Kingdom," VfS Annual Conference 2016 (Augsburg): Demographic Change 145622, Verein für Socialpolitik / German Economic Association.
    13. Blanco, Iván & Wehrheim, David, 2017. "The bright side of financial derivatives: Options trading and firm innovation," Journal of Financial Economics, Elsevier, vol. 125(1), pages 99-119.

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