Effects of executive compensation incentive on R&D investments: a behavioural study of corporate governance based on Taiwanese firms
by Weining Liu; Hsiuling Wen
International Journal of Corporate Governance (IJCG), Vol. 4, No. 3, 2013

Abstract: From the perspective of corporate governance, the compensation scheme directly motivates executive behaviour, and corporate governance importantly affects the innovative capacity of a firm. Stock-based pay is a powerful tool with which to link an executive's compensation to a company's long-term profitability. However, a question remains regarding whether stock-based pay and cash compensation have different effects on an executive's behaviour in the formulation of firm strategies, particularly those regarding R&D investments. Therefore, this investigation uses two moderating variables, firm risk and board composition to study their moderation of the correlation between executive compensation and the behaviour of executives in making corporate R&D investments. We find stock compensation is more likely to promote innovation in high-risk firms, whereas cash compensation is more likely to do so in low-risk firms. Additionally, in firms with a relatively high outsider board representation, stock-based compensation motivates executives to take innovation risks to justify their pay.

Online publication date: Mon, 02-Sep-2013

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