Are over-paid CEOs better innovators?

Joint Authors

Fakhfakh, Hamadi
Jubayr, Habib

Source

إرشاد المشاريع و المؤسسات : الريادة الاجتماعية و التمويل : أي نموذج للأعمال : المنعقد في الفترة 20-21 يونيو 2013

Publisher

Université Ibn Zohr Faculté des Lettres et des Sciences Humaines

Publication Date

2013-06-30

Country of Publication

Morocco

No. of Pages

29

Main Subjects

Economics & Business Administration

Topics

• Executive Management

English Abstract

Purpose – This paper focus on the pay level of the highest paid executive director which we label as "Executive Director’s Organizational Level" (henceforth EDOL) to raise the question if highest paid CEOs invest heavily in innovative projects.

To answer this question, we measure the firm’s innovation effort by the extent of R&D spending and the total number of patents and patent citations.

least squares (2SLS) regressions, which assume the endogenous relationship among variables, are then ruled to model the effect (s) of the EDOL in firm’s innovation attributes; R&D expenditures, patents and patents citations.

Findings – Our results suggest that over-paid CEOs are more likely to invest in R&D projects.

We provide evidence that CEOs are better innovators when compensation committees are powerful and investor rights are well protected.

Check tests show that the pay-performance "innovation" effect for option-based compensation is higher than that for stock-based compensation.

Within the options (stocks) rewards, unvested options (restricted stocks) are the most effective.

However, we find that over-paid CEOs of low-growth firms achieve less innovation compared to those of high -growth firms.

Throughout, we reveal that the effect of CEOs performance-pay on innovation is mainly relevant among overconfident managers than non-overconfident managers.

Research limitations/implications – The major limitation concerns our innovation fruits’ measures which do not capture perfectly top managers’ innovation efforts.

In fact, patents (patent citations) data do not highlight any information neither about the model innovation features nor about its economic value (innovation success).

Another limitation concerns our focusing on U.S.

context where shareholders are highly diversified and ownership is fully dispersed.

Hence, our conclusions may go missing when considering cases (i.e, European or Asian) where investors face systematic constraints on their financing and therefore their risk-taking preferences.

Practical implications – Considering the "innovation" effect of CEOs’ equity-based compensation helps to a better understanding of the firm value’s creating and adding process.

Hence, firms should rely excessively on equity-based compensation schemes.

Within the management’s portfolio of incentives, directors should grant special attention to the stock-option rewards.

The implications are potentially useful for shareholders in order to address the incentive effect of managerial compensation on firm performance and risk taking.

Our findings have moreover important implications for the structure of optimal compensation contracts.

Originality/value – By taking a new look at the issue, this paper departs from previous literature in three ways.

First, this study highlights, both from a "statutory" and an Design/methodology/approach – We compiled a panel dataset of 205 American firms from five technology-intensive industries spanning the period 2000-2004.

Two-stage- "activist" perspective, whether CEOs’ intends to invest in value-enhancing innovations are contingent upon compensation committee independence and investor protection level.

Second, it is one of the first to control for the managerial power thesis (as reflected in the EDOL) when dealing with executive pay debate.

Third, the paper explores that over-paid CEOs are less innovators among industries where growth opportunities are lower.

Data Type

Conference Papers

Record ID

BIM-426157

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