Does CEO Power and Compensation Drive Innovation Performance in the U.S. Pharmaceutical Industry?

Abstract

Drawing upon the agency and upper-echelons theory, this article investigates the association between CEO power, compensation and innovation performance by using the U.S. pharmaceutical industry as illustration. We find, first, both CEO power and compensation have curvilinear associations with innovation performance. Second, the long-term compensation or long-term incentive plan (annual stock options, restricted stock, and other long-term compensation) and short-term compensation or cash (salary and bonus) have diverse impacts on the associations between CEO power and innovation performance. Our findings highlight a more profound understanding that CEO compensation plays twofold roles. Precisely, the long-term compensation is indeed a governance mechanism that aligns the interest of powerful agent with the shareholders'. Surprisingly, to an extent, short-term compensation contributes to the agency problem by weakening the motivation of a highly powerful agent in championing innovation. The study adds to the literature of corporate governance, strategic leadership and innovation by providing an understanding of direct and indirect associations of CEO power and compensation on innovation performance.