Executive Compensation in the Information Technology Industry

Abstract

An innovative business practice attributed to the information technology (IT) industry is the aggressive use of employee stock options to compensate executives and other employees. In this study, we investigate whether the greater use of stock options in the IT industry can be explained on the basis of general economic relationships that apply to firms in all industries. To examine differences in compensating top executives, we estimate a system of simultaneous equations that is designed to accommodate interconnections between performance, the level of compensation, and the mix of compensation components. We document that the shares of both bonus and option pay increase with performance and that the pay level and the extent of incentive pay positively affect firm performance. We identify economic factors that may influence the use of options and show that there are significant differences in these factors between IT and other industries. We find that, while much of the greater use of options by IT firms is explained by the economic factors, significant residual differences remain. We also find that, when performance and other factors are considered, the level of executive pay in the IT industry is not higher than in other industries.information technology industry, executive compensation, stock options, pay for performance

Determinants of director compensation in two-tier systems: evidence from German panel data

“…Interestingly, the coefficient of Risk is negative across the models and thus not in line with our hypothesis H 1a . A possible explanation is that risky companies may be particularly reluctant to accept incentive-based compensation because those companies face greater difficulty (and thus higher costs) when using those contracts, given the risk-aversion of corporate directors (Beatty and Zajac 1994;Anderson et al 2000). We also find an inverse relationship with regard to product market competition, which suggests that a substitution effect might be limited to incentive pay adoption (H 3b ).…”

The Structure and Performance Consequences of Equity Grants to Employees of New Economy Firms

“…Articles by Brandal (2000) and Portnot and Moltzen (2000), for example, suggest that equity grants in new economy firms reflect significantly different economic priorities or a completely different set of factors that are not yet in equilibrium (e.g., imitating competitors because optimal practices in this rapidly-evolving industrial sector are not yet known). Research by Anderson, Banker, and Ravindran (2000) finds that information technology firms and firms in the Silicon Valley make larger equity grants than more traditional firms even after controlling for the traditional economic determinants used in prior empirical research.…”

“…other forms compensation (e.g., Lewellen, Loderer, and Martin (1 9 87), Smith and Watts (1 992), Clinch, 1991;Gaver and Gaver, 1993;Yermack (1 995), Janakiraman (1 998), Core and Guay (1 999, 2001), Anderson, Banker, and Ravindran (2000)). These discussions typically emph asize three potential benefits from equity grants: (1 ) incentive effects, (2) tax savings, and (3) cash flow considerations.…”

“…If the same economic model applies to both new and old economy firms, this test allows us to determine whether equity grants in new economy firms are actually higher than those in their old economy counterparts after controlling for differences in firm characteristics. This approach is similar to that used by Anderson, Banker, and Ravindran (2000) in their study of compensation practices in information t echnology firms relative to more traditional firms. Our second test allows both the intercept and slope coefficients to vary across the two subsamples by incorporating interactions between the new economy indicator and the predictor variables, as well as the new economy indicator alone.…”

“…Relative to more traditional firms , new economy firms provide a larger proportion of compensation in the form of equity grants, hav e more unexercised stock options as a percent of total shares outstanding, and are more likely to use broadbased stock option programs that cover employees throughout the organization (Anderson, Banker, and Ravindran, 2000;Sesil, Kroumov a, Blasi, and Kruse, 2000).…”