CEO pay sensitivities in innovative firms

Abstract

PurposeThis study aims to investigate whether compensation committees provide the chief executive officers (CEOs) with incentives to undertake “income-decreasing” but potentially “value-enhancing” innovation expenditures. The authors specifically analyze pay–performance relationships for innovative firms relative to all other firms. This study is critical because innovation is expensive and has uncertain outcomes.Design/methodology/approachUsing alternative accounting performance measures and market performance measures, the authors estimate an econometric model of CEO compensation in innovative firms that incorporates the interaction of endogenous innovation and firm performance.FindingsThe authors document an incremental positive association between changes in accounting performance measures and CEO compensation changes in innovative firms relative to other firms. This sensitivity of executive pay to firm performance is higher for firms that innovate. These results support the hypothesis that compensation committees provide incentives to carry out risky innovation by tying executive compensation more closely to firm performance. This finding survives a battery of sensitivity tests.Practical implicationsThe implications of this study are significant. Capital needs to support risky research and development investments (Tidd and Besant, 2018; Baldwin and Johnson, 1995) form the basis of innovative firms' operations. Considering these expenses, if CEOs, who play a critical role in the scanning, adapting and implementing innovative needs in a firm, are not protected and compensated for making risky choices, the entire investment itself will be threatened. Hence, the findings reiterate and support earlier findings that speak to the importance of compensating CEOs to make high-risk investments that will lead to long-term economic and financial gains for the firm when the innovative behaviors result in competitive market shares and profits.Originality/valueThe original work is related to the investigation of pay–performance sensitivity in the presence of innovation, which has not been fully investigated in prior literature.

ESG disclosure and pay-performance sensitivity

“…The results of the estimations to answer H 1 support the perspectives of agency theory, as the results confirm the existence of PPS. These results corroborate the findings of Aguiar and Pimentel (2017), Alves et al (2016), Brandão et al (2019), Iyengar and Sundararajan (2021), Raithatha andKomera (2016), andZhou et al (2017), and diverge from Ghrab et al (2021) and Iglesias et al (2022).…”

“…The evidence found in the literature is mixed, and the results on the sensitivity of executive pay to market performance are still inconclusive (Aguiar & Pimentel, 2017;Brandão et al, 2019;Ghrab et al, 2021;Iglesias et al, 2022;Iyengar & Sundararajan, 2021). There are studies that have found positive effects (Aguiar & Pimentel, 2017;Alves et al, 2016;Amzaleg et al, 2014;Brandão et al, 2019;Iyengar & Sundararajan, 2021;Lei et al, 2019;Ouyang et al, 2019;Yang et al, 2021;Zhou et al, 2017), others negative (Ghrab et al, 2021), mixed (Raithatha & Komera, 2016), or not statistically significant (Iglesias et al, 2022).…”

“…The studies on PPS are inconclusive (Aguiar & Pimentel, 2017;Brandão et al, 2019;Ghrab et al, 2021;Iglesias et al, 2022;Iyengar & Sundararajan, 2021). In addition, studies on the impact of ESG disclosure on executive pay (Cai et al, 2011;Gillan et al, 2010;Jian & Lee, 2015;Karim et al, 2018;Rath et al, 2020) and the moderating effect of ESG disclosure on the sensitivity of executive pay to market performance (Chang et al, 2018;Cho & Ibrahim, 2021;Rath et al, 2020), a relationship that has not been identified in the national literature, are scarce and inconclusive from a theoretical and empirical point of view.…”

Divulgação ESG e sensibilidade da remuneração executiva ao desempenho de mercado

“…Estudos sobre PPS são inconclusivos (Aguiar & Pimentel, 2017;Brandão et al, 2019;Ghrab et al, 2021;Iglesias et al, 2022;Iyengar & Sundararajan, 2021). Além disso, são escassos e inconclusivos, do ponto de vista teórico e empírico, os estudos envolvendo o efeito da divulgação ESG na remuneração executiva (Cai et al, 2011;Gillan et al, 2010;Jian & Lee, 2015;Karim et al, 2018;Rath et al, 2020) e o efeito moderador da divulgação ESG na sensibilidade da remuneração executiva ao desempenho de mercado (Chang et al, 2018;Cho & Ibrahim, 2021;Rath et al, 2020), relação esta que não foi identificada na literatura nacional.…”

“…As evidências encontradas na literatura são mistas, sendo os resultados da sensibilidade da remuneração executiva ao desempenho de mercado ainda inconclusivos (Aguiar & Pimentel, 2017;Brandão et al, 2019;Ghrab et al, 2021;Iglesias et al, 2022;Iyengar & Sundararajan, 2021). Há estudos que verificaram efeitos positivos (Aguiar & Pimentel, 2017;Alves et al, 2016;Amzaleg et al, 2014;Brandão et al, 2019;Iyengar & Sundararajan, 2021;Lei et al, 2019;Ouyang et al, 2019;Yang et al, 2021;Zhou et al, 2017) outros negativos (Ghrab et al, 2021), mistos (Raithatha & Komera, 2016) e sem significância estatística (Iglesias et al, 2022).…”