Executive compensation in the information technology industry

An innovative business practice attributed to the information technology (I T) industry is the aggressive use of employee stock options to compensate e xecutives and other employees. In this study, we investigate whether the gr eater use of stock options in the IT industry can be explained on the basis of general economic relationships that apply to firms in all industries. T o examine differences in compensating top executives, we estimate a system of simultaneous equations that is designed to accommodate interconnections between performance, the level of compensation, and the mix of compensation components. We document that the shares of both bonus and option pay incre ase with performance and that the pay level and the extent of incentive pay positively affect firm performance. We identify economic factors that may influence the use of options and show that there are significant difference s in these factors between IT and other industries. We find that, while muc h of the greater use of options by IT firms is explained by the economic fa ctors, significant residual differences remain. We also find that, when per formance and other factors are considered, the level of executive pay in th e IT industry is not higher than in other industries.