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.