The influence of corporate strategy, maturity, and change in the competitive environment on executive compensation contracts: Evidence from the pharmaceutical industry

This dissertation explores two aspects of executive compensation that have not been directly addressed in the literature. The first chapter investigates whether firms pursuing different strategies (e.g., prospector (innovator) versus defender (cost leader)) within the same industry and firms that are at different stages of their corporate life cycles within the same industry structure CEO compensation contracts differently. The second chapter builds on evidence that firms alter CEO compensation contracts in response to regulatory change by examining the response of compensation contracts to a nonregulatory change in the competitive environment.; The two studies utilize 1,545 firm-year observations from the pharmaceutical industry. Firms are partitioned into brand name producers (innovators), generic producers (cost leaders), and development stage firms (that have not yet had their first product approved by the FDA). These groups allow examination of the differences in compensation contracts associated with competitive strategy and corporate maturity. For example, I argue that generic producers, due to the cost focus of their strategy, will place greater weight on accounting performance measures in the determination of CEO compensation, while for brand name producers and development stage firms R&D expense will be positively associated with CEO compensation. The combination of legislative (mandated Medicaid rebates), political (extensive scrutiny of drug price increases), and economic (increased bargaining power of managed care organizations) changes in 1991 leads to my prediction that the optimal CEO compensation contract for brand name producers changed following 1991 to encourage effective executive response to the changes in the competitive environment.; The results are disappointing. Generic producers and development stage firms do use higher proportions of short-term compensation than brand name producers, as expected. The data do not support, however, my predictions regarding the differential weighting of performance measures in compensation contracts across firm type. Finally, the results do not show consistent evidence that brand name producers altered CEO compensation contracts systematically following the competitive environment changes in 1991.