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ABSTRACT This study examines the underexplored relationship between a firm's business strategy and executive compensation. While research has extensively analyzed the standard economic and governance determinants of executive pay, the causal role of an organization's overarching strategic posture remains unclear. Using a sample of 27,084 firm‐year observations from 3,072 Chinese listed firms across 2005–2022, we examine how a composite measure of strategic aggressiveness affects executive compensation. Firms adopting aggressive prospector strategies pay executives significantly higher compensation than conservative defender firms do; this pattern is more significant for firms with high strategic differentiation, transparent disclosure, concentrated ownership, and intense industry competition. Enhanced executive human capital and innovative output act as mediating channels, indicating that boards use competitive compensation to align managerial incentives with strategic risks.
Liu et al. (Thu,) studied this question.