Business strategy and CEO pay duration

In this study, we investigate the effect of firm's business strategy on an important feature of chief executive officer (CEO) incentive compensation – the pay duration. Drawing on archival data collected from a large sample of US listed firms, we find that firms following a prospector strategy grant longer-duration compensation to their CEOs than firms following a defender strategy. We further show that this effect of business strategy on pay duration is more pronounced for firms with higher information asymmetry and firms managed by CEOs with higher revealed ability. Our results are robust to alternative business strategy measures, an entropy balancing approach, alternative fixed-effects models and an alternative pay duration measure that excludes performance-vesting grants. Overall, the findings are consistent with prospector firms using longer pay duration to extend managers' investment horizon and to retain managerial talent. © 2024 Accounting and Finance Association of Australia and New Zealand.