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Incentives and innovation: evidence from CEO compensation contracts

  • 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)

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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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1117.pdf
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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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