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This study uses the resource-based view of the firm and agency theory to examine the relationship between innovation and CEO pay in 90 high-technology firms. With firm size, performance, and other factors controlled, CEO short-term compensation was related to innovation as measured by number of patents and R&D spending. The data also suggest a less consistent temporal relationship between innovation and long-term CEO compensation in the high-technology firms. In a control sample of 74 lowtechnology firms, there was no relationship between innovation and either short- or long-term CEO pay.
High-technology firms need to produce a steady stream of innovations in order to survive in hypercompetitive technology markets (D'Aveni, 1994; Hamel & Prahalad, 1994; Schilling & Hill, 1998). Yet at present little is known about the relationship between chief executive officer (CEO) pay and innovation (Gomez-Mejia & Wiseman, 1997). This study makes two important contributions to this literature. First, it combines the resource-based view of the firm and agency theory to suggest that top executives in high-technology companies should be rewarded for sustaining the firms' capability to innovate. Thus, it brings the resource-based view into the large and ever-growing research on CEO pay, most of which has an agency-theoretic orientation. Taking this combined perspective, we argue that in a very dynamic business environment, such as that of high-technology firms, the value and uniqueness of knowledgeintensive resources can be swiftly lost to competitors. Therefore, evidence of CEO innovation efforts in high-technology firms needs to be rewarded using short-term pay (to support continuous self-transformation) and long-term compensation (to nurture and develop the core competencies that result in enduring uniqueness and value in order to outrun the competition).
The study also fills an important empirical gap in the executive compensation literature. It directly examines, in a comparative fashion, the differential relationship between innovation efforts and shortand long-term CEO pay within high-technology firms, where innovation is a key source of competitive advantage, and low-technology firms, where innovation is less critical for success. We used a comprehensive measure of innovation activity that includes both numbers of patents and investments in innovation and research and development (R&D). Prior CEO pay studies including R&D have used it primarily as a surrogate for executive risk taking across a broad spectrum of firms (e.g.,...