Executive compensation, strategic investment, productivity, and firm performance

Executive compensation design is central to corporate governance. Pay contracts may shape managers’ incentives to undertake investments with delayed returns. This paper analyzes how the equity-based and long-term component of CEO compensation relates to strategic investment, productivity, and operating performance among U.S. public firms covered by Compustat and ExecuComp over 1992–2017. We estimate a recursive generalized structural equation model linking the share of equity-based and long-term compensation (EB-LT) to R&D expenditure, advertising expenditure, Levinsohn–Petrin total factor productivity, and EBITDA, and examine CEO firm-specific tenure as a moderator. A 10-percentage-point higher EB-LT share is associated with 11.4% higher R&D spending and 8.9% higher advertising spending. R&D and advertising are, in turn, strongly related to productivity, and productivity is positively related to EBITDA. The findings identify a structured compensation–investment–productivity–performance nexus in which EB-LT compensation is most consistently connected to strategic investment channels. They also suggest that equity-based incentive design should be evaluated jointly with firms’ investment strategies, productivity outcomes, and CEO tenure profiles, rather than viewed in isolation as a mechanism for improving productivity or profits.