The Interaction between R&D Investment Decisions and Compensation Policy

Harley E Ryan and Roy A Wiggins

Financial Management, 2002, vol. 31, issue 1

Abstract: We use a system of equations to investigate the endogenous relation between R&D investment and CEO compensation. Growth opportunity is positively related to the use of stock options. Stock options positively affect R&D while restricted stock has a negative influence. These results suggest that CEO compensation should balance incentive alignment and efficient risk sharing with risk-averse managers. Stock options are also found to be negatively related to leverage, but positively related to convertible debt. Additionally, this analysis suggests that institutional ownership directly influences R&D investment by providing managerial oversight and indirectly by influencing the compensation policy.

Date: 2002
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