ABSTRACT This study empirically examines the influence of CEO compensation structure on corporate strategic choice, categorized according to the Miles and Snow typology as prospector, defender, or analyzer. Using multinomial logit models on firm‐level data, we find that the composition of CEO pay is a significant determinant of strategy. Specifically, equity‐based compensation and higher pay‐performance sensitivity are strongly associated with an increased likelihood of innovation‐oriented strategies (prospector and analyzer). Conversely, cash‐based compensation is linked to a greater probability of adopting a defender strategy, which emphasizes efficiency and profitability. Robustness checks, including control function models to address endogeneity and seemingly unrelated regressions, confirm these findings. The results further indicate that equity compensation and pay‐performance sensitivity have a more pronounced effect on driving research and development (R&D) intensity than on profitability. Our findings underscore the critical role of compensation committees in designing pay packages that align executive incentives with the firm's strategic objectives.
Chandra S. Mishra (Tue,) studied this question.