The influence of executive compensation on innovation

Abstract

This dissertation examines the relationship between CEO compensation components and the innovation capabilities of publicly traded companies in the United States of America. Based on an extensive literature review, I hypothesize that payment components with convex payoffs as well as those with long-term payoffs have a positive influence on innovation. Further, I expect cash based compensations to have no or a negative influence on innovation. Lastly, I develop a hypothesis regarding instruments that protect executives in case of failure and their positive influence on innovation. Using a sample of S&P 1500 constituents over 14 years, I find that an increase of the proportion of stock options in CEO compensation has a positive influence on innovation input and output as well as on innovation effectiveness. I obtain similar results for the proportion of long term incentives in the total compensation. For salary and bonus, I find that a higher proportion has a negative influence on innovation input and output. After a sample split, I show that all findings related to compensation components only hold for firms in less innovative industries. In a subsequent small sample analysis, I characterize elements of golden parachute agreements and classify them in accordance to the protection they offer to CEOs. Subsequently, I find evidence that more innovative firms use more and further developed agreements. I conclude that such protections for failure can influence the motivation of executives to innovate.