When Pay-Performance Incentives Are Detrimental To CEOs’ Exploration Orientation: The Role Of Power

Ndtoungou Pfouga, Martial Stephane ORCID: https://orcid.org/0000-0003-1482-8901 and Bocquet, Rachel (2023) When Pay-Performance Incentives Are Detrimental To CEOs’ Exploration Orientation: The Role Of Power. Academy of Management Proceedings, 2023 (1). ISSN 0065-0668

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Abstract

When are pay-performance incentives detrimental to CEOs’ exploration orientation? This study investigates the influence of pay-performance incentives on the exploration-exploitation choices of CEOs. Building on the behavioral agency model, we argue that pay-performance incentives will respectively have a negative relationship with the exploration orientation of CEOs and a positive relationship with the exploitation orientation of CEOs. We further argue that a high level of managerial power weakens the negative effects of pay-performance incentives on CEOs’ exploration orientation. Using computer-aided textual analysis to capture the exploration and exploitation orientations from the rhetoric of 154 CEOs of S&P 500 firms during earnings calls with investors, we do not find a significant relationship between pay-performance incentives and CEOs’ exploration. However, we find support for the moderating effect of managerial power such that the negative relationship between pay-performance incentives and CEOs’ exploration orientation only exists when CEOs have a low level of managerial power and the negative relationship disappears when CEOs have a high level of managerial power. This result is robust to alternative measures of exploration such as the environmental innovation performance of the firm.