Executive Compensation as a Moderator of the Innovation – Performance Relationship 1

Little research has been done to try and connect type of compensation with the use of a specific competitive strategy. We propose that compensation (percentage of base, bonus, options-granted, and stock for the top management team) will moderate the innovation strategy to performance relationship based on risk and time horizon. Analyses of panel data from 1994 to 1998 for 380 firms show that the innovation strategy to performance relationship is moderated by bonus and options-granted compensation. These findings suggest that implementing an innovation strategy and using a high percentage of bonus compensation will lead to greater performance. Alternately, implementing an innovation strategy and using a low percentage of options granted will create the best outcome. Our findings help shed light on the firm-specific mechanisms that enable strategy implementation.

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