Innovation, R&D and Managerial Compensation

53 Pages Posted: 9 Apr 2010

See all articles by Paroma Sanyal

Paroma Sanyal

Brandeis University - Department of Economics

Laarni T. Bulan

Cornerstone Research

Date Written: April 9, 2010

Abstract

This paper investigates whether aligning manager and owner incentives can improve the innovation performance of firms. We find that pay-sensitivity works to align managerial actions to shareholder interests. As managerial wealth becomes more sensitive to the firm’s stock price the innovation performance of a firm improves. Entrenched managers, however, are more likely to act myopically and follow strategies that result in a large number of low quality patents. Short-term incentives have little impact on innovation. Higher managerial tenure increases the probability of R&D spending and innovation quality and thus better aligns the managers’ actions with a firm’s long-term goals. CEO control of the firm, however, decreases its innovation performance.

Keywords: Patents, R&D, Incentive Alignment, Executive Compensation Contracts, Pay-Performance Sensitivity

JEL Classification: G32, G30, L2, O3

Suggested Citation

Sanyal, Paroma and Bulan, Laarni Tobia, Innovation, R&D and Managerial Compensation (April 9, 2010). Available at SSRN: https://ssrn.com/abstract=1587055 or http://dx.doi.org/10.2139/ssrn.1587055

Paroma Sanyal (Contact Author)

Brandeis University - Department of Economics ( email )

Waltham, MA 02454
United States

Laarni Tobia Bulan

Cornerstone Research ( email )

Boston, MA
United States

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