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Unintended consequences of compensation peer groups on corporate innovation

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  • Hsu, Yuan-Teng
  • Huang, Chia-Wei
  • Koedijk, Kees G.

Abstract

When companies select and use compensation peers to determine chief executive officer (CEO) compensation, they create unintended peer effects on corporate innovation due to the similarities between these companies and their compensation peers in terms of product markets, CEO characteristics, and compensation schemes. After controlling for industry and geography peer groups, the findings confirm that the average innovation activity of compensation peers is a significant and distinct predictor of corporate innovation. Further analysis showed that (1) the peer effect is stronger in firms and compensation peers that pay their CEOs using long-term compensation, in firms with stronger labor market competition and board monitoring, and in peer companies that experience higher innovation competition and are closer to the median peer company in the peer group; (2) the obtained results are likely not attributable to the knowledge spillover mechanism and are more consistent with the peer pressure mechanism; and (3) the Securities and Exchange Commission's 2006 executive compensation disclosure rules may have generated peer effects.

Suggested Citation

  • Hsu, Yuan-Teng & Huang, Chia-Wei & Koedijk, Kees G., 2023. "Unintended consequences of compensation peer groups on corporate innovation," Journal of Corporate Finance, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:corfin:v:78:y:2023:i:c:s092911992200164x
    DOI: 10.1016/j.jcorpfin.2022.102321
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    Keywords

    Peer effect; R&D expenditure; Patent; Compensation peer group;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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