Incentives and Innovation: Evidence from CEO Compensation Contracts
63 Pages Posted: 5 Nov 2011
Date Written: October 3, 2011
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 favorably. 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, incentives
JEL Classification: D8, O31
Suggested Citation: Suggested Citation