The Innovation Game: A study of the relationship between CEO compensation and R&D spending

Sammanfattning: While previous research has examined how CEO compensation influences managerial behavior, little is known about whether and how compensation influences R&D spending decisions. Because theoretical models predict that CEOs are disincentivized to undertake projects with uncertain long-term payoffs, scholars argue that CEO compensation should be linked to long-term performance. To investigate this in the context of R&D spending, we examine the relationship between the fraction of long-term compensation awarded to CEOs and R&D intensity. We find that the level of CEO long-term compensation relative to total compensation is associated with the level of R&D intensity. However, we find no clear evidence that changes in the fraction of long-term compensation is followed by changes in R&D intensity. Nonetheless, when separating the different components of long-term compensation, we see that changes in stock option awards relative to total compensation is positively associated with changes in subsequent R&D intensity. Our study contributes to an understanding of the role of compensation design in aligning the incentives of CEOs with the firm's strategic goals for R&D spending.