Executive Compensation and Compensation Risk: Evidence from Technology Firms

Abstract

PurposeThe purpose of this research is to investigate factors that contribute to technology firms paying higher compensation than non-technology firms, and why the mix of compensation at technology firms is different than the compensation packages at non-technology firms.Design/methodology/approachThis research used a sample of 1,009 firm-year observations for the five-year period from 2001 to 2005 and random-effects regression models.FindingsIt was found that the total compensation paid to the CEOs of technology firms is higher than the total compensation paid to the CEOs of non-technology firms, and that the value of the stock options granted to the former is greater than the value of the stock options granted to the latter.Research limitations/implicationsThe results are largely consistent with the labour market efficiency perspective. The higher compensation paid to CEOs in technology firms seems to be commensurate with the higher compensation risk that CEOs in technology firms bear.Practical implicationsCompensation designers should consider both the benefits and costs of granting stock and stock options to executives. An increased portion of stock options definitely aligns the interests of shareholders and CEOs together, and could maximize the retentive effect if CEOs have a significant amount of their wealth in unvested in-the-money options.Social implicationsConsistent with the literature, a CEO could earn much higher pay if he or she also serves as the chair of the board of directors. Practically, firms do not require all governance mechanisms. They just require one set of suitable governance mechanisms.Originality/valueThis paper is the first to investigate factors that contribute to technology firms paying higher compensation than non-technology firms, and that do explain why the mix of compensation at technology firms is different than the compensation packages at non-technology firms.