Does equity-based compensation motivate executives to build strong brands?

Abstract

ABSTRACT To defeat myopic brand management, we need to understand better what motivates executives to invest in brand building. Drawing from agency theory, we argue that a better alignment of executivesʻ and shareholdersʻ interests can help. Tests using longitudinal compensation data of chief executive officers (CEO) from 123 public firms suggest that decreasing the sensitivity of CEOʻs Equity-Based Compensation (EBC) to the firmʻs stock price and increasing its sensitivity to the firmʻs stock return volatility are associated with higher brand equity. Weak governance somewhat offsets these effects. Moreover, we find that the impact of EBC on brand equity is partially mediated through the firmʻs strategic emphasis. Our research highlights the importance of understanding managerial incentives as drivers of brand equity.