Managerial compensation and R&D investments: the role of the external managerial labour market

This paper investigates the importance of the external managerial labour market in the determination of managerial compensation and in the influence of the compensation incentives on a firm's R&D investments. I design an empirical model including the compensation adjustment regression, of which the focus is the role of the external labour market, and the R&D regression that examines how the compensation incentives derived from the external labour market affect a firm's R&D intensity. Empirical results suggest that the R&D intensity is positively related to the premium of the actual pay adjustments over the expected pay adjustments based on the external labour market comparisons. The effect of the compensation incentives on the R&D investments is strongest when managers expect pay to decrease but actually experience an increase in pay.