Top Management Team Incentives and Business Model Innovation

Abstract

Firms are forced to adapt to an increasingly changing business environment that often requires not only product and process innovation, but also business model innovation (BMI) activities. Whether or not a firm reconfigures its business model is typically decided by the top management team (TMT). However, as previous BMI research has neglected the role of the TMT in BMI, we know little about when and why a TMT engages in BMI activities. In this study, we focus on the compensation schemes of TMT members as a motivating factor to take risks and facilitate BMI. Adopting a behavioral agency model (BAM) perspective, we develop a research model that examines the relationship between TMT long-term incentives and a firm’s BMI intensity. Here, we consider the moderating roles of termination protection and long-term incentive dispersion in the TMT. In addition, we take into account the general pay dispersion in the total compensation among the top management as a trigger of tournaments. To test the proposed model, we use a unique panel dataset comprising 6,428 observations of publicly listed U.S. firms between 2006 and 2018. Our study contributes to a better understanding of how and when top management incentives trigger BMI activities and adds to both the compensation and BAM literature by providing further insights on how compensation schemes affect a group of agents in an high-risk and interdependent work context such as BMI.