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Incentives and Innovation: Evidence from CEO Compensation Contracts

Bank of Finland Research Discussion Paper No. 17/2011

63 Pages Posted: 5 Nov 2011

See all articles by Bill B. Francis

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Zenu Sharma

St John's University; Rensselaer Polytechnic Institute

Multiple version iconThere are 2 versions of this paper

Date Written: October 3, 2011

Abstract

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

Francis, Bill B. and Hasan, Iftekhar and Sharma, Zenu, Incentives and Innovation: Evidence from CEO Compensation Contracts (October 3, 2011). Bank of Finland Research Discussion Paper No. 17/2011, Available at SSRN: https://ssrn.com/abstract=1953947 or http://dx.doi.org/10.2139/ssrn.1953947

Bill B. Francis

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

Troy, NY 12180
United States

Iftekhar Hasan (Contact Author)

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Zenu Sharma

St John's University ( email )

8000 Utopia Pkwy
Queens, NY 11439
United States
7189905496 (Phone)

Rensselaer Polytechnic Institute ( email )

Troy, NY 12180
United States

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