BUSINESS UNIT INNOVATION AND THE STRUCTURE OF EXECUTIVE-COMPENSATION

We examine whether the structure of compensation for the divisional CE O is related to subsequent innovative activity within the division, an d whether the divisional CEO's compensation is structured as a functio n of the expected innovation opportunity set facing the division. Both the expected innovation opportunity set and the divisional executive' s compensation contract are treated as endogenous variables by adoptin g a simultaneous equation approach. We find modest evidence that the p roportion of total compensation tied to long-term components has a pos itive relation with future innovation, but no evidence that this propo rtion has a positive relation with the expected innovation opportunity set.