A quantitative study of the relationship between ceo compensation and firm exploration in high-tech industries.

Abstract

The relationship between CEO compensation and exploration is an under investigated area of literature. In particular, the implications of the share of stockbased compensation remains largely untested. As the CEO’s wealth is more and more connected to firm value, risk-aversion should arise. We test for the relationship between the share of stock-based CEO compensation and exploration by using patents as proxy for the latter. We create a model based on several previous research methods. Patents are, per definition, exploration and as such each patent is assigned a value of 1. Thereafter, we discount the value of the patent based on its exploitative characteristics. In our study, this is represented by the technical class of the patent and whether the technical class is novel to the firm or a frequent repeater in the firm’s patent portfolio. We calculate the value by utilizing a Herfindahl-Hirschman Index. When conducting the study, we find the relationship to be inconclusive and not statistically significant. However, our novel model, by its tangible and quantitative nature, open for future research on the topic.