Effects of executive compensation incentive on R&D investments: a behavioural study of corporate governance based on Taiwanese firms

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.