CEO Compensation and Corporate Political Strategy: Exploring the Moderating Roles of CEO Tenure and Duality

Abstract

Although substantial research has examined the influence of chief executive officers (CEOs) and other factors on corporate political strategy (CPS), far less is known about the underlying motivations driving CEOs' decisions to engage in such strategies. This study investigates the effect of CEO long-term compensation on CPS. Drawing from agency theory arguments, we propose that when CEOs' wealth is tied to the firm in the form of long-term stock options, they are more likely to pursue CPS, as they stand to gain from favorable changes in the firm's political and regulatory environment. Furthermore, this specific relationship is likely to be strengthened by CEO tenure and CEO duality. We test our hypotheses using a sample of 444 United States pharmaceutical firms for the years 2000–2010. The pharmaceutical industry provides a suitable context for testing our hypothesis, given its stringent compliance requirements and heavy regulatory environment. This study offers empirical evidence that firms awarding long-term compensation to their CEOs invest more heavily in political strategies, and this relationship is further reinforced when the CEO has a longer tenure and concurrently chairs the board of directors. Overall, it demonstrates that properly designed compensation schemes may influence under some conditions the critical role that CEOs play in shaping their firms' CPS investments.