Fact of the Week: Firms that Significantly Reduce Executive Stock Options Have 66 Percent Lower R&D Investment Two Years Later

March 25, 2019

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Firms that significantly reduce their executive stock options have 66 percent lower R&D investment two years later.

Source: Michael Hickfang and Ulrike Holder, “The Impact of Stock Options on Risk-Taking: Founder-CEOs and Innovation,” Discussion Paper of the Institute for Organizational Economics, December 2018.

Commentary: Aligning executive incentives such as stock options with firms’ long-term growth objectives is crucial for promoting innovation. A new study examined the magnitude of this effect, focusing on a 2005 change in tax regulations that made providing stock options more expensive. The researchers compared firms that significantly reduced stock options as a share of executive compensation to firms that didn’t, and they found that after two years the firms that reduced stock options had also reduced their R&D investments by 66 percent relative to their counterparts.