Symmetry in the Sensitivity of Executive Bonus Compensation to Earnings and Returns in High-technology Firms

Abstract

This chapter examines the sensitivity of executive incentive compensation to market-adjusted returns and changes in earnings for high-tech (HT) firms vis-a-vis firms (NHT) in other industries. Consistent with the hypotheses, this chapter uncovers the following evidence: First, the sensitivity of executive bonus compensation to market-adjusted returns is weaker and more symmetric for HT firms than for NHT firms (a control group), which implies that the problem of ex post settling up, documented in Leone et al. (2006), may be far less serious in HT firms than in NHT firms. Second, the sensitivity of executive incentive compensation to earnings changes is generally more symmetric for HT firms than for NHT firms, which is consistent with the view that HT firms engage in more conservative financial reporting than NHT firms. Third, the sensitivity of executive equity-based compensation to market-adjusted returns is significantly negative for HT firms compared to NHT firms when bad earnings news is announced. The results imply that HT firms, with a strong motive to attract and retain their highly talented executives, judiciously use both short-term and long-term incentive compensation schemes by compensating for a reduction of short-term incentive pay with an increase in long-term incentive pay. The issue of executive compensation has been a longstanding one in the United States and Canada, and the issue of executive compensation-performance sensitivity for HT firms is also relevant in this era of the information technology (IT) revolution, especially when prior research has shown that HT firms differ from NHT firms in their market-valuation process.