Abstract

This study investigates the effect of long-term incentives for CEOs in promoting innovation in firms. CEOs are less likely to take risks due to their less diversified wealth portfolios compared to stockholders. Long-term incentives, such as stock ownership and stock option pay, provide a financial reward for taking risks that could pay off in the future and encourage CEOs to invest in riskier innovation, such as exploration. The study also examines the moderating effects of organizational characteristics, such as firm size and slack resources, and external environment, such as competitive intensity, on the relationship between long-term incentives for CEOs and exploration. The results suggest that long-term focus incentives for CEOs can positively influence exploration efforts within a firm. In addition, we found that firm size and slack resources positively moderate the relationship between long-term incentives for CEOs and exploration and competitive intensity negatively moderates such relationship. This study helps managers understand the conditions when long-term incentives become stronger or weaker.