THE CHIEF EXECUTIVE OFFICER’S COMPENSATION AND FIRM’S RESEARCH AND DEVELOPMENT INVESTMENTS: A COMPARISON BETWEEN YOUNG AND MATURE FIRMS

Fang Yang
Jeanne M. David
University of Detroit Mercy
ABSTRACT
The present study examines the relation between Research and Development (R&D)
spending and Chief Executive Officer (CEO) incentive systems in young and mature firms. The
economic statistics indicate that young and mature firms demonstrate different levels of intensity in
R&D investments over time. For instance, in the 1990s, there was a dramatic boom in R&D
investments, and the young firms accounted for nearly the entire R&D boom during that period.
Since CEOs play a key role in deciding whether to invest in R&D as well as the intensity of
investment in R&D, we wonder whether CEO incentive systems have different impacts on CEO R&D
investment decision making between the two types of firms. The results of the study indicate that
CEO short-term–based compensation is not significantly related to the intensity of R&D investment.
However, there is a statistically significant relationship between CEO long-term–based
compensation and firm R&D investment intensity in young firms. On the other hand, we find that in
mature firms, neither short-term nor long-term compensation is related to firm R&D investment
intensity. Overall, the findings suggest that executive compensation plans may have different
impacts on R&D investment decision making in firms of different ages.