The influence of R&D investments and Property Rights on Compensation Arrangements

Protecting intellectual property is a major challenge for many firms. This paper examines how compensation arrangements are influenced by the mechanisms firms use to protect their intellectual property. Consistent with firms being concerned about employees leaving to exploit R&D related information on their own or with competing firms, I find that executives’ unvested equity holdings and total compensation are higher when firms invest more of their resources in R&D and that this relation is most pronounced for R&D related executives. In addition, consistent with innovating firms also being concerned about nonexecutive employee mobility, I find that stock option grants to nonexecutive employees are positively associated with R&D intensity. Most importantly, I find that these relations are weaker in industries in which firms rely more on property rights and less on restricting information leakage to protect their intellectual property. My findings are consistent with firms being less concerned about employee mobility when they can effectively protect their intellectual property with property rights.