Business strategy, executive compensation and firm performance

Yasheng Chen and Johnny Jermias

Accounting and Finance, 2014, vol. 54, issue 1, 113-134

Abstract: type="main" xml:lang="en">

We investigate the impact of business strategy on the use of performance-linked compensation (PLC) and long-term incentive plans. We also examine the relation between strategy and compensation structure fit and performance. Using cluster and content analyses to classify a firm’s business strategy, we predict and find that product differentiation firms use a higher proportion of PLCs than cost-leadership firms. Furthermore, we find that the misfit between business strategy and compensation structure has a negative impact on performance. This study contributes to the executive compensation literature by recognizing that business strategy influences the compensation structure and that a strategy and compensation structure misfit negatively affects performance.

Date: 2014
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