Executive Compensation Incentives and Corporate R&D Investments: An Analysis Based on the Moderating Effect of Managerial Power

ABSTRACT

Using data on Chinese A-share listed companies, this paper explores the interactive effects of managerial power and executive compensation incentives on corporate R&D investments. We find that higher executive monetary compensation and perquisite consumption help increase corporate R&D investments, while a large compensation gap within the management team can inhibit corporate R&D investments. We further show that managerial power has different moderating effects on the relation between management incentives and corporate R&D investments. Managerial power weakens the positive effects of explicit and implicit incentives of executives on corporate R&D investments, while it strengthens the negative effect of the compensation gap within the management team on corporate R&D investments.

KEYWORDS:

• Compensation incentives
• managerial power
• R&D investment
• tournament effect

JEL:

• O32
• G30

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. On September 16, 2009, the Ministry of Human Resources and Social Security, together with the six ministries and commissions including the Ministry of Finance, jointly issued the “Guiding Opinions on Further Regulating the Compensation of Executives in Central State-Owned Enterprises,” which stipulated that the basic annual salary of executives of enterprises must be associated with the income of on-post staff in central state-owned enterprises (SOEs) in the previous year and clearly regulated the compensation of executives in central SOEs. Compared with previous compensation control measures, it has greater authority and wider influence.

2. We exclude those companies listed after 2010, because the financial data prior to IPO are not readily available in our sample period. Moreover, there might be IPO effects if the post-IPO period is not long enough (Zhou et al. 2017).

3. With the current disclosed perquisite consumption data, it is not possible for us to separate the specific perquisite consumption value of top three executives, it can only be measured by the total of the disclosed items related to perquisite consumption. However, it is generally believed that the higher the position and the greater the power, the more likely and convenient it is to enjoy the perquisite consumption. Hence, the top three executives with the highest explicit monetary compensation may also enjoy a majority of the perquisite consumption.

Additional information

Funding

The work was supported by the The National Social Science Fund of China [19BGL033].