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Business Strategy, Executive Compensation, and Firm Performance

36 Pages Posted: 13 Jan 2009  

Yasheng Chen

Xiamen University - Accounting Department

Johnny Jermias

Simon Fraser University (SFU) - Beedie School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 11, 2009

Abstract

This study investigates the influence of business strategy on the relationship between executive compensation and firm performance. Using cluster analyzes to classify a firm's business strategy, we predict and find that performance-linked compensation and managerial share ownership are more effective for product differentiators than for cost leaders. The results are consistent with the view that managers of product differentiation firms are more willing to take risks and to make a trade-off between pay security and share ownership to benefit from anticipated future performance. We also find that, contrary to our prediction, current payment of a long-term incentive plan is less relevant for product differentiators than for cost leaders. One plausible explanation for this finding is that long-term incentive payouts reflect past performance that is less persistent for firms seeking innovation and differentiation. This study contributes to the existing literature on executive compensation by recognizing that the effects of executive compensation on performance vary systematically across business strategies.

Keywords: Business strategy, executive compensation, cluster analysis, performance

JEL Classification: D21, G32, J33, M41

Suggested Citation

Chen, Yasheng and Jermias, Johnny, Business Strategy, Executive Compensation, and Firm Performance (January 11, 2009). CAAA Annual Conference 2009 Paper. Available at SSRN: https://ssrn.com/abstract=1326183 or http://dx.doi.org/10.2139/ssrn.1326183

Yasheng Chen (Contact Author)

Xiamen University - Accounting Department ( email )

Siming South Road
Duxing Building No.2
Xiamen, Fujian 361005
China

HOME PAGE: http://sm.xmu.edu.cn/keyan/TeacherWeb/Teacher_Details.aspx?User_ID=557

Johnny Jermias

Simon Fraser University (SFU) - Beedie School of Business ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada
604-291-4257 (Phone)
604-291-4920 (Fax)

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