Research & Development Intensity and Executive Compensation
Rajiv D. Banker
Temple University - Department of Accounting
Temple University - Fox School of Business and Management
Northeastern Illinois University
April 14, 2013
We examine the relation between R&D intensity and the relative weights in CEO compensation on ability signals and financial performance measures. We argue that because CEO’s technology-related ability is more important in R&D intensive firms, the weights on relevant ability signals in CEO compensation should be increasing with R&D intensity. Because both accounting and market-based performance measures have low precision in R&D intensive firms, the weights on short-term incentives tied to current earnings and stock returns should be decreasing with R&D intensity, whereas the reliance on long-term equity incentives should be increasing with R&D intensity. We test these predictions using Compustat/CRSP/ExecuComp data from 1992 to 2006, combined with hand-collected personal data on CEO’s education and professional background. As expected, we find that R&D intensive firms have higher weights on relevant CEO ability signals, lower weights on financial performance measures, and greater reliance on long-term equity incentives.
Number of Pages in PDF File: 37
Date posted: August 17, 2011 ; Last revised: April 19, 2014
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