When CEO compensation plan based on risk changes firm strategic variation and strategic deviation? The moderating role of shareholder return¿Cuándo el Plan de Compensación del CEO basado en el Riesgo cambia la Variación Estratégica de la Empresa y la Desviación Estratégica? El papel moderador del retorno total para los accionistasQuando o Plano de Remuneração do CEO Baseado em Risco altera a Variação Estratégica e o Desvio Estratégico da Companhia? O papel moderador do retorno total para os …

Abstract

Purpose The authors extend the recent research using the risk component of human resource’s (HR’s) compensation plans to examine the effects of risk components on two strategic outcomes: within-firm temporal change, or strategic variation, and firm strategic divergence from the industry, or strategic deviation. In addition, the authors examine the role of previous financial performance as a boundary moderator condition of the effects of risk components in the compensation plan and firm strategic outcomes. Design/methodology/approach To examine the effects of low- and high-risk components of executive compensation on strategic variation and deviation over time, the authors collected data from 2,510 companies listed in the Standard and Poor’s 500 index in a panel data format of a 12-year period. The authors gathered financial and other firm-level data from COMPUSTAT, and executive compensation and executive-level data from ExecuComp. Findings The findings support the main effects of risk components on strategic change, while both high- and low-risk components act on strategic deviation contingent on the moderating role of total shareholder return (TSR). In the theoretical framework, the authors test the moderating role of total shareholder return (TSR) as a boundary condition of the effects of risk components in the compensation plan. In doing so, the authors provide a fine-grained understanding of the influence of compensation plan risk components on outcomes proximal to executives, such as the maintenance of the status quo and the search for financial gains. Research limitations/implications New studies can explore a three-way moderating effect on performance indicators, such as TSR, Tobin’s Q and return on asset. The authors addressed this limitation and did a comparative analysis, but the authors did not include additional moderating mechanisms in these interactive effects. Practical implications By disaggregating the executive’s compensation based on the risk components, boards of directors can mitigate any possible unwanted biases in the relationship between principal and agent. Originality/value By considering the influence of both low- and high-risk components of compensation plans on strategic outcomes –instead of firm performance – this study expands strategy literature supporting the influence of compensation schema on a firm’s outcomes. This path is new because it offers a moderating perspective to understand the strategic deviations and changes that chief executive officers imprint in their firms.