Incentives and Innovation: Evidence from CEO Compensation Contracts

53 Pages Posted: 18 Feb 2011  

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Zenu Sharma

Long Island University

Multiple version iconThere are 2 versions of this paper

Date Written: February 16, 2011

Abstract

We investigate the relationship between chief executive officer (CEO) compensation and innovation. In an empirical examination of compensation contracts of S&P 4, 5, 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 that pay for performance sensitivity (PPS) has no relationship, and golden parachutes have a positive relationship, with patents and citations to patents. Finally, we show that subsequent to project failure managers’ compensation contracts are reset favorably. We provide support for the theory that compensation contracts that offer long-term commitment and protection from failure are more suitable for innovation.

Suggested Citation

Francis, Bill B. and Hasan, Iftekhar and Sharma, Zenu, Incentives and Innovation: Evidence from CEO Compensation Contracts (February 16, 2011). Available at SSRN: https://ssrn.com/abstract=1762621 or http://dx.doi.org/10.2139/ssrn.1762621

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Iftekhar Hasan

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Zenu Sharma (Contact Author)

Long Island University ( email )

720 Northern Boulevard
Brookville, 11548-1327
United States

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