R&D Investment, Assets in Place, Employee Stock Bonus and Firm Performance

As firms rely heavily on R&D for their competitive advantages and as technologies become more integrated and complex, individual performance becomes more difficult and costly for shareholders to govern and evaluate. The information asymmetry problems between employees and shareholders thus may occur. This in turn increases innovation risks resulting in impaired firm performance. To mitigate the agency problems and consequently reduce innovation risks, firms need to institute an appropriate incentive mechanism. By awarding stock ownership, employee stock bonus may serve as an interestalignment device to reduce innovation uncertainties by attracting, retaining and motivating high-quality technical individuals.Using a panel sample of 32 listed IT firms on the Taiwan Stock Exchange during 1995-2004, the empirical results indicate that employee stock bonus has a positive impact on firm performance. Additionally, the stock bonus-firm performance relationship is stronger in R&D-intensive firms and in asset-intensive firms. These findings are consistent with the argument that employee stock bonus can help mitigate agency problems and consequently reduce innovation risks, leading to enhanced firm performance as an end result. Finally, it is also evident that firm performance increases with stock bonus paying, but the ratio of stock bonus to total salary does not increase with firm performance.