R&D Expenditures and CEO Compensation

Abstract

This study investigates whether compensation committees seek to prevent opportunistic reductions in R&D expenditures. I hypothesize that changes in R&D spending are more strongly positively associated with changes in CEO compensation in two situations: (1) when the CEO approaches retirement, and (2) when the firm faces a small earnings decline or a small loss. Consistent with these hypotheses, the results indicate that the association between changes in R&D spending and changes in the value of CEO annual option grants is significantly positive in the above two situations, and insignificant otherwise. Similar results hold for changes in CEO annual total compensation. The results also show that neither situation is associated with reduced R&D spending. Overall, these findings suggest that compensation committees respond to, and effectively mitigate, potential opportunistic reductions in R&D spending.