Corporate digital transformation, governance shifts and executive pay-performance sensitivity

Abstract

We utilized text mining techniques to gauge a company's level of digital transformation and found that the higher the degree of digitalization, the more apparent the decoupling of executive compensation from performance, indicating lower sensitivity of executive pay to performance outcomes. Within the framework of agency theory, digital technology empowers shifts in corporate governance models, enabling process-based behavioral monitoring and constraining governance mechanisms, thereby reducing reliance on outcome-based incentive mechanisms. Heterogeneous analysis reveals that the substitutive effect of digitization on the pay-performance sensitivity is more pronounced in companies with lower executive ownership. These companies often rely more on compensation incentives in the absence of digital technology. Moreover, the effectiveness of digital technology in enhancing governance depends on the user's wealth of knowledge and technical proficiency. We additionally confirmed that digital transformation has a positive impact on mitigating agency problems, as it enhances information quality, improves internal control standards, reduces excessive perk, and diminishes managerial short-termism. In essence, digital transformation indeed elevates governance regime. Furthermore, we discovered that digitalization increases the association between compensation and executive effort. Our research findings provide a fresh perspective on corporate governance and executive incentive mechanisms in emerging markets.