Research Discussion Papers, Bank of Finland
No 17/2011:
Incentives and innovation: evidence from CEO compensation contracts
Bill Francis, Iftekhar Hasan ()
and Zenu Sharma
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.
Keywords: CEO compensation; innovation and incentives; (follow links to similar papers)
JEL-Codes: D82; O31; (follow links to similar papers)
63 pages, October 3, 2011
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