Introduction
Boards of directors (BOD) increasingly play an essential role in the growth of high-technology firms through human and relational capital; however, more research needs to examine how BOD compensation can influence firm performance. On the one hand, it reflects the value of human and relational capital; on the other hand, directors are self-interested agents in their own right (Dalton & Dalton, Reference Dalton and Dalton2005; Deutsch, Keil, & Laamanen, Reference Deutsch, Keil and Laamanen2011; Hillman & Dalziel, Reference Hillman and Dalziel2003; Nicolson & Newton, Reference Nicolson and Newton2010).
Executive compensation research has primarily focused on the relationship between CEO and top management team (TMT) pay and firm performance, often ignoring another entity in the dominant coalition, namely the BOD (Dalton & Dalton, Reference Dalton and Dalton2005; Devers, Cannella, Reilly, & Yoder, Reference Devers, Cannella, Reilly and Yoder2007; Finkelstein & Hambrick, Reference Finkelstein and Hambrick1996; Nicolson & Newton, Reference Nicolson and Newton2010; O’Sullivan & Diacon, Reference O’Sullivan and Diacon2003). The BOD is a very influential piece of this coalition, and for past research to have ignored it thus is a matter of grave concern. This omission of the BOD in prior research suggests that there is a rather large gap in the extant literature on executive compensation. This has given rise to an essential research gap in our understanding of the issues related to the BOD compensation–performance relationship since today’s boards are highly proactive and accountable in steering firm strategies toward performance. The enactment of the 2002 Sarbanes-Oxley Act in the U.S.A. has further pressured U.S. firms’ boards to share their counsel with management rather than remaining passive observers (Dalton & Dalton, Reference Dalton and Dalton2005; Kemp, Reference Kemp2006; Ruigrok, Peck, & Keller, Reference Ruigrok, Peck and Keller2006; Tihanyi, Johnson, Hoskisson, & Hitt, Reference Tihanyi, Johnson, Hoskisson and Hitt2003). This study examines the relationship between BOD compensation and firm performance, particularly adjusting for firm complexity in the high-technology sector. This approach tackles the rather prominent research gap that currently exists, as our study has included the important BOD compensation component into the overall question of how executive compensation affects firm performance.
During the past two decades, directors of high-technology firms have more frequently been on call to share their expertise as firms proactively seek to leverage their capital in the form of networks, experience, and advice that will help them design and execute firm strategies (Gomulya & Boeker, Reference Gomulya and Boeker2016; Hoskisson, Chirico, Zyung, & Gambeta, Reference Hoskisson, Chirico, Zyung and Gambeta2017; Withers, Hillman, & Cannella, Reference Withers, Hillman and Cannella2012). As human and relational capital has become sought after, examining the relationship between compensation and firm performance is becoming more relevant (Gomulya & Boeker, Reference Gomulya and Boeker2016; Linck, Netter, & Yang, Reference Linck, Netter and Yang2008; Tien, Chen, & Chuang, Reference Tien, Chen and Chuang2013). However, there is a dearth of research on how the human and relational capital of high-tech board members affect firms’ performance and their own self-interest (Brown, Anderson, Salas, & Ward, Reference Brown, Anderson, Salas and Ward2017; Desai, Reference Desai2016). We explore how a high technology firm’s accounting-based and market-based performance measures are influenced by its board’s compensation, reflecting human and relational capital and alignment of interest with stakeholders.
A review of upper echelon literature shows that exploring links between BOD and their influence on firm outcomes mainly relies on the classical agency or dual-agency-based explanations (e.g., Brown et al., Reference Brown, Anderson, Salas and Ward2017; Desai, Reference Desai2016; Deutsch et al., Reference Deutsch, Keil and Laamanen2011; Hendry, Reference Hendry2005; Roberts, McNulty, & Stiles, Reference Roberts, McNulty and Stiles2005; Salehi, Lari Dashtbayaz, & Mohtashami, Reference Salehi, Lari Dashtbayaz and Mohtashami2021; Yoo & Kim, Reference Yoo and Kim2012). Classical agency reasoning considers members of the upper echelon to be self-interested agents whose agendas are often opportunistic and may conflict with those of shareholders (Berle & Means, Reference Berle and Means1991; Devers et al., Reference Devers, Cannella, Reilly and Yoder2007; Hendry, Reference Hendry2005; Jensen & Meckling, Reference Jensen and Meckling1976; Yoo & Kim, Reference Yoo and Kim2012). Such explanations, however, do not present the complete picture (Devers et al., Reference Devers, Cannella, Reilly and Yoder2007) because classical agency theory does not consider the potential contribution of executives in terms of human and relational capital (Deutsch et al., Reference Deutsch, Keil and Laamanen2011; Devers et al., Reference Devers, Cannella, Reilly and Yoder2007; Hillman & Dalziel, Reference Hillman and Dalziel2003). To present a completer and more updated picture of this phenomenon, we draw on the insights afforded by the board capital view (BCV) (Hillman & Dalziel, Reference Hillman and Dalziel2003) and the behavioral agency theory (BAT) (Martin, Gomez-Mejia, & Wiseman, Reference Martin, Gomez-Mejia and Wiseman2013; Zona, Reference Zona2012). The BCV considers the board ‘a provider of resources (e.g., legitimacy, advice and counsel, links to other organizations, etc.) and firm performance’. Board capital is a combination of board members’ human capital in terms of their experience, expertise, and reputation as well as alignment of shareholders’ interests with those of their agents (BOD, in our context).
Behaviorally, such an alignment may occur when executives are motivated to perform to the best of their abilities, leverage their resources and capabilities, and take justifiable risks in the interest of firm growth. Integrating the insights of these two views, BOD compensation reflects the demands made on human and relational capital, on the board’s discretion and accountability, as well as alignment with stakeholder interests. We build on the premise that a combination of these factors reflected by BOD compensation facilitates contribution toward maximal firm performance while the principal–agent relationship continues to evolve in the post-Sarbanes-Oxley Act era.
We focus our study on firms in the technology sector because they are known for seeking out board members with a high degree of human and relational capital and taking care of members’ interests, which makes them well-suited to examine the relationship between BOD pay and performance (Desai, Reference Desai2016; Kor & Sundaramurthy, Reference Kor and Sundaramurthy2009; Makri & Scandura, Reference Makri and Scandura2010). High-tech firms are under continuous pressure in uncertain, complex, or competitive environments. As such, they require knowledgeable board members with ‘tacit knowledge of the opportunities, threats, competitive conditions, technology and regulations specific to their industry’ (Kor & Sundaramurthy, Reference Kor and Sundaramurthy2009: 786).
Board members are sought for their effective governance and expert advice to TMT (Hillman & Dalziel, Reference Hillman and Dalziel2003), as they can have ‘a profound effect on a firm’s growth as they influence managerial choices through monitoring and advisory functions’ (Kor & Sundaramurthy, Reference Kor and Sundaramurthy2009: 983). In the high technology sector, they must advise on leveraging knowledge, spearheading innovations, and commercializing rents. These directors may bring ‘cosmopolitan’ insights gained from diverse experiences (Useem, Reference Useem1984: 48) to a firm (Carpenter & Westphal, Reference Carpenter and Westphal2001; Rindova, Reference Rindova1999). This way they can share their knowledge about best practices in a sector and create a supportive environment within an organization even though the BOD does not involve itself in day-to-day matters (Deutsch et al., Reference Deutsch, Keil and Laamanen2011; Devers et al., Reference Devers, Cannella, Reilly and Yoder2007; Kor & Sundaramurthy, Reference Kor and Sundaramurthy2009; Makri & Scandura, Reference Makri and Scandura2010). Directors may also bring social capital and connections developed via multiple board appointments and industry experience, which could help the firm access critical resources and initiate new business relationships (Burt, Reference Burt1992; Hillman, Reference Hillman2005; Pfeffer & Salancik, Reference Pfeffer and Salancik1978). Overall, they bring legitimacy, access to resources, and linkages with suppliers and customers that are essential for success in high-velocity environments (Kor & Sundaramurthy, Reference Kor and Sundaramurthy2009).
Given the limited amount of empirical research on compensation, particularly when it comes to board compensation, we performed rigorous longitudinal analyses along with robustness checks using a sample that consists of all publicly traded U.S. firms in high technology sectors, in particular, those founded from 1992 to 2019 with a total of 9,127 firm years. We believe this representative sample has enabled us to focus on whether board pay in high-tech firms may influence their firms’ performance. By focusing attention on the critical but often overlooked topic of board of director compensation, we hope to contribute to the literature on executive compensation in a unique context where knowledge arguably matters the most. In a way, by focusing on and including BOD compensation, we are heeding Huse’s call for more studies that challenge extant ways of doing research, which at present seems to involve ignoring the BOD when conducting research on executive compensation and firm performance.
We also heed the 2007 call of Devers and colleagues better to integrate the fields of strategic management and finance, as most executive compensation research emanates from these areas, and ‘that cross-discipline integration holds the potential to significantly advance compensation research and practice.’ (p. 1039). To follow this advice, we aim not only to incorporate theoretical insights but also to apply the empirical rigor required by the fields of management and finance.
Theory and hypotheses
BOD pay in high technology sectors and firm performance
Board capital is ‘the sum of the human and social capital of the board of directors, and a proxy for the board’s ability to provide resources to the firm [which includes] directors’ occupational background, functional background, industry insider/outsider status, as well as industry and non-industry ties’ (Haynes & Hillman, Reference Haynes and Hillman2010: 1145). Board capital is a valuable resource for firms with a breadth of knowledge, experience, and social ties that may contribute to firm performance. BAT views directors as hardworking individuals who typically act in good faith, do their best for the organization, and ensure that people around them will share in their success (Martin et al., Reference Martin, Gomez-Mejia and Wiseman2013).
Combining the insights of BCV and BAT,Footnote 1 we suggest that BOD members will be motivated to perform to the best of their abilities, leverage their resources and capabilities, and take justifiable risks for firm growth when their interests are aligned and fulfilled through fair compensation (e.g., Conyon, Reference Conyon2014; Demirer & Yuan, Reference Demirer and Yuan2013). When their interests are aligned, they will go into ‘resource provision’ mode by providing advice and counsel to the firm on ‘substantial matters such as strategy formulation, access to information outside the firm, preferential access to valuable resources through personal connections, skills and expertise and legitimacy’ (Haynes & Hillman, Reference Haynes and Hillman2010: 1145). They will expend their time, energy, and attention to take a long-term perspective on risk-bearing while deciding on market opportunity (Wiseman & Gomez-Mejia, Reference Wiseman and Gomez-Mejia1998).
Boards can affect the strategic decisions of firms and their performance through human and social capital and are motivated to do so when their interests are aligned with shareholders via compensation. Conyon (Reference Conyon2014) found that executive compensation was positively correlated with firm performance, while Ozkan (Reference Ozkan2011) found that total compensation was positively related to firm performance. Similarly, Sanchez-Marin and Baixauli-Soler (Reference Sanchez-Marin and Baixauli-Soler2015) found that the association between firm performance and executive compensation is a conditional one, and that better performance is seen in owner-controlled firms, when the BOD are more effective monitors. Thus, combined insights from BCV and BAT suggest that BOD pay level will align an agent’s interests to motivate them to leverage their capital both intrinsically and extrinsically. That is, when BOD pay level2 matches stakeholders’ interests, superior performance will hopefully be the outcome. A compelling measure of accounting-based firm performance is a return on assets (ROA), which represents firm profitability in terms of the total set of resources or assets. Abdullah, Ismail, & Nachum (Reference Abdullah, Ismail and Nachum2016)have suggested that ‘accounting performance, which reflects … actual performance [through] board members, is indicative of the magnitude and quality of the pool [of BOD]’. Hull & Rothenberg (Reference Hull and Rothenberg2008: 785) note that ‘ROA yields the most direct information about the results of the chosen allocation of resources’, and is well suited to measuring tangible asset utilization in terms of a realization of board advice and interest alignment.
Hypothesis 1a: BOD pay level will be positively associated with accounting-based firm performance (ROA).
Similarly, BOD compensation will be associated with the market’s assessment of upper echelon contribution to firm value in terms of board capital and its alignment with future performance as reflected in Tobin’s Q, the present value of future cash flow based on current and future information, assuming that firms with superior decision-making resources and capabilities will create more economic value from a given quantity of assets (David, Yoshikawa, Chari, & Rasheed, Reference David, Yoshikawa, Chari and Rasheed2006). It is considered a forward-looking, stock market-based measure of firm profitability from a shareholder perspective (Lindenberg & Ross, Reference Lindenberg and Ross1981) and is particularly appropriate to our context as it reflects a market assessment of board capital and interest alignment and how these may be realized to produce superior performance. Thus, we propose:
Hypothesis 1b: BOD pay level will be positively associated with market-based firm performance (Tobin’s Q).
BOD long-term pay structure in high technology sectors and firm performance
In high technology sectors, compensation as an incentive is often related to firm innovations and new product launches, which unfold over time (Balkin, Markman, & Gomez-Mejia, Reference Balkin, Markman and Gomez-Mejia2000). Upper echelon decisions, innovation strategies, and compensation are often related in these sectors (Yanadori & Marler, Reference Yanadori and Marler2006). Since a board’s long-term pay structure refers to compensation such as bonuses and stock options, we propose that such a long-term pay structure will show both the effects of board capital and the alignment of interests.
From the lens of BCV and BAT, we argue that a board’s human and relational capital needs time and opportunity to show an effect on performance. Often based on performance, long-term compensation provides leeway in unfolding over time. Compensation in the long form (e.g., stock options) shifts decision-makers’ focus to a firm’s future performance. Given that new product development and its success in high-tech sectors is revealed based on factors such as R&D, patents, consumer tastes and demand, competitors, and life cycle, long-term pay structures motivate the BOD to pay attention to competitive advantages instead of short-term, one-time success strategies.
Building on the prior research of Demirer and Yuan (Reference Demirer and Yuan2013), we propose that compensation that shows up over the long term will be associated with firm performance. This is because board members will be better positioned to exploit their human and relational capital over time and align their interests with those of stakeholders while making advisory decisions for superior performance. Hence, compensation in relatively long-term forms, that is, long-term pay structure, will influence accounting-based firm performance (ROA) and market-based firm performance.
Hypothesis 2a: BOD’s long-term pay structure will be positively associated with accounting-based firm performance (ROA).
Hypothesis 2b: BOD long-term pay structure will be positively associated with market-based firm performance (Tobin’s Q).
BOD variable pay in the high-technology sectors and firm performance
Next, we explore the impact of BOD variable pay on firm performance in the high-technology sectors. BOD variable pay is the compensation adjusted for firm complexity – such adjustment is made because higher firm complexity demands higher contribution from the BOD members in all the aspects of their governance (Carpenter & Sanders, Reference Carpenter and Sanders2002). A firm’s structural complexity and environmental setting are critical in compensation (Carpenter & Sanders, Reference Carpenter and Sanders2002). The literature has shown that pay is not only a function of potential performance but also of the complexity that can arise from structure, including the critical demands of diverse units and the competitive repertoire of managers (Connelly, Haynes, Tihanyi, Gamache, & Devers, Reference Connelly, Haynes, Tihanyi, Gamache and Devers2016; Hoskisson et al., Reference Hoskisson, Chirico, Zyung and Gambeta2017; Pathak, Hoskisson, & Johnson, Reference Pathak, Hoskisson and Johnson2014; Sanders & Carpenter, Reference Sanders and Carpenter2003). BOD pay is adjusted for firm complexity in terms of management and accountability. It represents the degree to which board pay considers the internal characteristics of the firm, including its structure, diversification levels, and R&D investments. In other words, BOD variable pay adjusted for firm complexity reflects the degree to which a firm faces multifaceted issues (Carpenter & Sanders, Reference Carpenter and Sanders2002).
Board members in high technology sectors must possess relevant technical knowledge, capabilities, and human and relational capital. Research has shown that most are highly qualified professionals, such as retired executives from other firms, lawyers, consultants, financial experts, academics, or domain experts (Dalziel, Gentry, & Bowerman, Reference Dalziel, Gentry and Bowerman2011; Gomulya & Boeker, Reference Gomulya and Boeker2016). They are thus intrinsically and extrinsically motivated to produce a superior firm performance on their watch because firm accomplishments can affect their reputation, which in turn has implications for their status in the business world and appointments at other firms (Gomulya & Boeker, Reference Gomulya and Boeker2016; Vehka & Vesa, Reference Vehka and Vesa2023).
In high-velocity environments, board members must conscientiously and continuously review, improve, veto, or ratify TMT’s strategic decisions. Such duties may be onerous when ambiguous strategic decisions or alternate strategies are called for (Beatty & Zajac, Reference Beatty and Zajac1994; Boeker, Reference Boeker1992; Fama & Jensen, Reference Fama and Jensen1983). Thus, board pay should be commensurate with responsibilities since competitive incentives motivate decision-makers to pay attention to the firm’s decisions, to advice, help with capital, and align interests with the shareholders, who are primarily interested in firm performance (Alexeyeva, Reference Alexeyeva2023; Deutsch, Reference Deutsch2007; Eisenhardt, Reference Eisenhardt1989; Mousavi, Zimon, Salehi, & Stępnicka, Reference Mousavi, Zimon, Salehi and Stępnicka2022; Tihanyi et al., Reference Tihanyi, Johnson, Hoskisson and Hitt2003).
In essence, competitive and justified BOD compensation should reflect the strategic value they bring to the firm and the pressures they face in executing their duty on behalf of shareholders (Byrd & Hickman, Reference Byrd and Hickman1992; Wright, Kroll, & Elenkov, Reference Wright, Kroll and Elenkov2002). Such compensation will motivate them to generate thoughtful counsel, cooperation, and support for the TMT and CEO, particularly in uncertain and complex situations, which may lead to superior firm performance (e.g., Alexeyeva, Reference Alexeyeva2023; Mousavi et al., Reference Mousavi, Zimon, Salehi and Stępnicka2022). They also provide legitimacy, environmental information, and access to outside stakeholders in their social network. Boards also monitor and ratify managerial decisions, which have implications for superior decision-making and firm performance. However, beyond a certain point, the value of variable pay in terms of the benefits of board capital and interest alignment will diminish. This is because there is a ceiling on how much a firm can adjust variable pay for complexity, exploit board capital, and align interests. Once these efforts are exhausted, redundancy and fatigue will set in. As a result, marginal benefits in terms of performance will decrease as the level of adjustment and utilization of board capital and alignment increases. Overextending these efforts may be counterproductive (e.g., Kor & Leblebici, Reference Kor and Leblebici2005). Hence, we propose the following:
Hypothesis 3a: The BOD member variable pay adjusted for firm complexity (that is, total compensation of all the directors other than the CEO in case of duality) will have a positive but diminishing effect on subsequent accounting-based firm performance (ROA).
Hypothesis 3b: The BOD member variable pay adjusted for firm complexity (that is, total compensation for all directors other than the CEO in case of duality) will have a positive but diminishing effect on subsequent market-based firm performance (Tobin’s Q).
Methods
Sample and data
Our sample of firms consisted of all publicly traded U.S. firms in high technology sectors listed on the NYSE, AMEX, and NASDAQ in the Execucomp and BoardEx databases from 1992 to 2019. Since board capital and interest alignment are arguably the most sought-after and are found in the high-technology sectors, we created a sample of firms from these high-technology sectors. This approach also reduces the potential for industry effects from less relevant sectors. Thus, our sample was limited to firms drawn from the particular industry SIC numbers in the U.S. market. High technology firms were defined as those included in SIC codes 28 (biotechnology and drugs), 35 (computer and related), 36 (electronics and communication), 37 (transportation equipment), 38 (medical equipment), 48 (telephone equipment and communications services), and 73 (software) (e.g., Desyllas & Hughes, Reference Desyllas and Hughes2010; Mousa, Bierly, & Wales, Reference Mousa, Bierly and Wales2014; Mousa & Reed, Reference Mousa and Reed2013).
We obtained stock return data from the CRSP database, while other accounting variables were gathered from the Compustat database. We obtained CEO compensation data from the ExecuComp database, which reports compensation data for executives in publicly traded firms. We used the Compustat segment database for the firm segment data, which were needed to calculate product and geographic diversification. Compustat, ExecuComp, and CRSP databases were accessed through Wharton Research Data Service. We combined the CRSP with Compustat using the CUSIP and year as the key. The resultant dataset matched with Execucomp by GVKEY and year.
The combined dataset merged with BoardEx data through a two-step process. First, BoardEx’s company ID was combined with the PERMNO from our dataset using the ticker symbol. Second, we matched the company’s name in BoardEx with the company name found in our dataset, using a name-recognizing algorithm, the Levenshtein algorithm, for those firms whose ticker symbols were missing. After matching, we arrived at the final sample of 5,588 firm years. We obtained board compensation data from the BoardEx database.
Measures
Independent variables
BOD pay level, also called BOD total pay, is the log of the average value of total compensation of all the firm’s directors other than the CEO. BOD long-term pay structure is defined as the proportion of long-term compensation to total compensation, which is averaged for directors other than the CEO.
BOD variable pay, contingent on firm complexity, was calculated similarly. BOD total pay was regressed for CEO total pay, firm size, R&D intensity, product diversification, and geographic diversification variables. Following Harder (Reference Harder1992), residuals were generated for each firm.
CEO pay level was defined as the log of the total compensation for a CEO.
CEO pay structure is the ratio of long-term pay to total pay.
Dependent variables
Accounting-based firm performance is the 3-year average return on assets. Market-based firm performance was captured through Tobin’s Q as a measure of firm performance. Tobin’s Q is defined as the ratio of the market value of assets to the book value of assets (Kaplan & Zingales, Reference Kaplan and Zingales1997). Tobin’s Q ‘captures the value of a firm as a whole rather than as the sum of its parts and implicitly includes the expected value of a firm’s future cash flows, which are capitalized in the market value of a firm’s assets (i.e., the combined market value of a firm’s debt and equity)’ (Dezsö & Ross, Reference Dezsö and Ross2012: 1078).
According to David et al. (Reference David, Yoshikawa, Chari and Rasheed2006), when the market value of capital is higher than the replacement cost of capital (Q > 1), as it is in our context, then the market will send positive signals about both the upper echelon’s human and relational capital as well as their alignment of interest and hopes that the market’s investments will generate greater returns than their costs. This indicates potential future profits, as Q suggests that the value created will exceed the costs. Conversely, when Q is less than 1, each additional dollar invested by the market will likely yield less than a dollar in market value, indicating the potential for future loss.
Table 1 presents a summary of construct names with brief descriptions.
Table 1. Construct names and descriptions
Control variables
We employed several controls for this study. Firm size was measured as the log of a firm’s total sales. Product diversification was calculated similarly to that used by Carpenter and Sanders (Reference Carpenter and Sanders2002). Product diversification of firm a was measured as 
$\sum {{P_{ia}}} \ln (\frac{1}{{{P_{ia}}}})$ where 
${P_{ia}}$ is the proportion of firm a’s sales in business segment i. Geographic diversification was measured following Carpenter & Sanders’ (Reference Carpenter and Sanders2002) method. Geographic diversification is the ‘sum of foreign sales/total sales, foreign assets/total assets, and geographic dispersion of foreign sales’. We have added prior performance also as an additional control variable.
Analysis
We employed a panel regression methodology to estimate our regression equations. Even though we included a host of control variables, it is possible that our results were affected by unobserved and omitted firm, industry, or year-specific factors, which might be correlated to BOD pay level or pay structure. We included firm fixed effects to ensure the results were not driven by omitted time-invariant firm-specific factors. Year-fixed effects were also included in regressions to control for contemporaneous macroeconomic conditions. We used Newey–West standard errors in our regressions to account for heteroskedasticity.
Finally, observations of a firm across time could be correlated. A violation of the independence assumption might therefore lead to biased standard errors. We clustered standard errors by the firm to control for residuals being correlated across time. We report the t statistics in parenthesis in tables that report regression results.
Results
In Table 2, we report the descriptive statistics of our dependent and independent variables. We report the mean and standard deviation for all variables. Further, we report correlation coefficients for all variables in a correlation matrix. The statistical significance of the correlation coefficients depends on the value of the correlation coefficients and number of observations. We performed t-tests based on the value of the correlation coefficients and number of observations. The results of the t-tests were as follows: If the reported correlation coefficient was greater than 0.016 (0.023), then the correlation coefficient was significant at a 5% (1%) significance level. None of the correlation coefficients was large enough to indicate multicollinearity.
Table 2. Descriptive statistics and correlation matrix
p < .05 for r > .016 and p < .01 for r > .023.
In Tables 3 and 4, we report the results of the regression analysis, first for the dependent variable return on assets (Table 3) and Tobin’s Q (Table 4).
Table 3. Summary of regressions testing Hypothesis 1a, 2a and 3a based on BODcompensation for high-tech firms
Robust p value in parentheses.
*** p < .01,
** p < .05,
* p < .1.
Table 4. Summary of regressions testing Hypothesis 1b, 2b and 3b based on BOD compensation for high-tech firms
Robust p value in parentheses.
*** p < .01, **p < .05, *p < .1.
The baseline models with the control variables, where ROA in Table 3 and Tobin’s Q in Table 4 were the dependent variables, are not reported. In the first column of Table 3, we report the regression estimates of BOD pay level as the independent variable of interest and all the control variables for ROA as the dependent variable. The coefficient on BOD pay level is positive (0.136) and significant at the 1% level. This result supports Hypothesis 1a, which predicted a positive association of BOD pay level with accounting-based performance (ROA).
Model 2 in Table 3 includes the BOD long-term pay structure; its coefficient is 0.372, which is significant at the 1% level. It supports Hypothesis 2a, which predicted a positive association of BOD long-term pay structure with accounting-based firm performance.
Model 3 adds BOD variable pay adjusted for firm complexity and all control variables. The coefficient of BOD variable pay adjusted for firm complexity is positive (5.631) and significant. To check for an inverted-U-shaped curve, the following model (4) adds the square term for BOD variable pay adjusted for firm complexity. The model also contains all control variables. The squared term coefficient is negative (−7.788) and significant, indicating that the relationship between BOD variable pay adjusted for firm complexity and ROA is nonlinear (inverted U-shaped). The results reported in columns 3 and 4 support Hypothesis 3a (See Figure 1).
Figure 1. Relationship between ROA and BOD variable pay adjusted for firm capacity.
For the dependent variable, Tobin’s Q, reflecting market-based performance, the first column of Table 4 shows regression estimates of BOD pay level as the independent variable of interest and all the control variables for Tobin’s Q as the dependent variable. The coefficient of BOD pay level is positive (0.034) and significant at the 1% level. This result supports Hypothesis 1b, which predicted a positive association of BOD pay level with market-based firm performance (Tobin’s Q). In model 2, Table 4 includes the BOD long-term pay structure; its coefficient is 0.111, which is significant at the 1% level, supporting Hypothesis 2b, which predicted a positive association of BOD long-term pay structure with market-based firm performance. Model 3 adds BOD variable pay adjusted for firm complexity and all control variables. The coefficient of BOD variable pay adjusted for firm complexity is positive (0.808) and significant. Model 4 adds the square term for BOD variable pay adjusted for firm complexity to check for the inverted-U-shaped curve. The model also contains all control variables. The squared term coefficient is negative (−1.815) and significant, indicating evidence of the relationship between BOD variable pay adjusted for firm complexity and Tobin’s Q is nonlinear (inverted U-shaped). The results reported in columns 3 and 4 support hypothesis 3b.
Robustness results: All industries
The regression results presented so far are only for the firms belonging to the high-tech industries. In order to assure the reader about the generality of our results, we re-estimate the regression equations with all firm and not only the high-tech firms.
In Table 5, the dependent variable is ROA and in Table 6, the dependent variable is Tobin’s Q. Models 1, 2, 3, and 4 in Tables 5 and 6 are like what were reported in Tables 3 and 4, respectively. In model 1 of Table 5, the coefficient on BOD pay level is positive (0.110) and significant at the 1% level. This result supports Hypothesis 1a, which predicted a positive association of BOD pay level with accounting-based performance (ROA). In model 2, the coefficient on BOD long term pay structure is positive (0.196) and statistically significant lending support to Hypothesis 2a. In model 3, the coefficient of BOD variable pay adjusted for firm complexity is positive (4.285) and significant. When we include the square term for BOD variable pay adjusted for firm complexity in model 4, the coefficient of the square term for BOD variable pay adjusted for firm complexity is negative and significant, similar to what we reported in Table 3 and suggesting a nonlinear relationship between ROA and BOD variable pay adjusted for firm complexity (Hypothesis 3a).
Table 5. Summary of regressions testing Hypothesis 1a, 2a and 3a based on BOD compensation for all firms
Robust p value in parentheses.
*** p < .01, **p < .05, *p < .1.
Table 6. Summary of regressions testing Hypothesis 1b, 2b and 3b based on BOD compensation for all firms
Robust p value in parentheses.
*** p < .01, **p < .05, *p < .1.
In model 1of Table 6, the coefficient of BOD pay level is positive (0.020) and significant in support of Hypothesis 1b, which predicted a positive association of BOD pay level with market-based firm performance (Tobin’s Q). We include BOD long-term pay structure in model 2, the coefficient of which is positive and significant supporting Hypothesis 2b. In model 3, we include BOD variable pay adjusted for firm complexity whose coefficient is positive and significant. We include the square term for BOD variable pay adjusted for firm complexity in model 4 and the coefficient of the square term for BOD variable pay adjusted for firm complexity is negative and significant. The results presented in models 3 and 4 support Hypothesis 3b.
Overall, the results presented in Tables 5 and 6 are in line with the results reported in table 3 and 4 and are in support of the hypothesis 1a, 1b, 2a, 2b, 3a, and 3b. We can infer that the results documented for the firms in the high-tech industries can be generalized and can be applied to all firms regardless of which industry they belong to.
Discussion and conclusion
While prior research has considered chiefly the CEO’s and TMT’s influence on firm performance (Gomulya & Boeker, Reference Gomulya and Boeker2016; Hoskisson et al., Reference Hoskisson, Chirico, Zyung and Gambeta2017), we set out to study the effects of board capital and interest alignment on high-technology firms’ accounting- and market-based performance. We posited and found that board members’ pay level, long-term pay structure, and variable pay adjusted for industry complexity may influence both types of firm performance. Specifically, we hypothesized and empirically found that the level of BOD variable pay adjusted for industry complexity has negative curvilinear effects on ROA and Tobin’s Q.
This finding is consistent with our theoretical argument that varying or matching compensation for human capital and board interests from the context of industry complexity are effective up to a point in terms of firm performance; however, past that point, the value of variable pay in eliciting the benefits of board capital and interest alignment will diminish. The incremental benefits of board capital and alignment will thus taper off after reaching a certain utilization level. Once these efforts are exhausted, redundancy and fatigue set in, and they may have a detrimental effect on performance. Our findings suggest that managing the ‘right’ level of variability or adjustment to complexity in BOD pay is central to generating superior firm performance.
Implications for theory
As far as we know, this is the first study to integrate the insights of BCV and BAT to examine the phenomena of accounting-based and market-based firm performance in the context of board compensation. Our results elucidate the role of the board’s ‘resource provisioning’ in the form of human and relational capital and empirically measure its impact on firm performance, contributing to the BCV and resource dependence theory (Hillman & Dalziel, Reference Hillman and Dalziel2003; Pfeffer & Salancik, Reference Pfeffer and Salancik1978).
Based on a rich sample of firms from the technology sector, we differentiate our measures from others through the breadth of boards covered. This enhances the generalizability of our findings. It also differs from case studies or those using a single sector as a sample (e.g., Goodstein et al., Reference Goodstein, Gautam and Boeker1994).
This study contributes to the literature on upper echelon compensation by focusing on an entity that has received little attention but has become increasingly influential, post-Sarbanes-Oxley Act, namely the board of directors. We agree with Carpenter and Sanders (Reference Carpenter and Sanders2002) contention that compensation studies that focus only on the CEO ‘may yield inconclusive results, or worse: results, which mask or ignore the rich underlying team dynamic’ (p. 375). More attention should be given to board members to advance knowledge of executive compensation and its impact, as they play an increasingly important role in firm decisions. More attention could also be focused on innovation (e.g., Nimr, Salehi, & Kardan, Reference Nimr, Salehi and Kardan2023), as innovation is a significant driver of firm performance. Perhaps, board compensation has an indirect effect on firm innovation, which in turns has an effect on firm performance. Additionally, future research should also pay more attention toward emerging markets and countries that have faced major societal upheavals, such as Iraq (e.g., Nimr et al., Reference Nimr, Salehi and Kardan2023; Salehi, Moradi, & Faysal, Reference Salehi, Moradi and Faysal2023). It would be insightful to discover how BOD compensation affects firm performance, when there are drastic societal upheavals affecting the overall macroeconomic ecosystem. Similarly, future research should also consider unraveling and teasing out the role of moderator variables in this overall relationship, similar to Jagirani, Chee Chee, and Binti Kosim (Reference Jagirani, Chee Chee and Binti Kosim2023). Our current findings help provide a pathway for future scholars to investigate pertinent moderators in the overall relationship. Perhaps, CEO duality or even capital adequacy could act as moderators (e.g., Jagirani et al., Reference Jagirani, Chee Chee and Binti Kosim2023) in the relationship between BOD compensation and firm performance.
Implications for practice
Our findings have practical implications for all the stakeholders who appoint and compensate the board members’ pay level. Given that (1) BOD members’ knowledge and social capital are the underlying mechanisms that influence firm performance and (2) interest alignment with the long-term pay structure and industry-complexity adjusted variable pay significantly influence firm performance in the technology sector, we suggest that firms should proactively search and hire such ‘knowledgeable executives whose interests can be aligned’ as BOD members. Our findings suggest that such executives, equipped with knowledge of the firm’s domain and rich social capital, would serve the stakeholders best. Vehka and Vesa (Reference Vehka and Vesa2023) found that board of director characteristics had a noticeable effect on advocacy performance. Applying the logic of their findings to ours, we feel bolstered enough to assert that if firms have sought out and hired experienced directors and compensated them fairly, then the firms will benefit from that directorial vast experience, which will be harnessed on behalf of the firm.
Our findings also resonate with Alexeyeva’s (Reference Alexeyeva2023) assertions that directors who hold multiple directorships tend to have better reputational capital, which then results in higher quality decision making ability and audit quality. Further, such executives should be deployed as valuable ‘human capital/resource and capability’ so that they proactively share their knowledge about best practices in their sector and frequently reach out to their contacts to access helpful knowledge. This ends up benefiting their firms thanks to the improved decision-making ability, and further honing of reputational capital. A prerequisite to this prescription is that firms must prefer those executives who have developed such capital and network via prior board appointments, formal and informal events, and experience. Such board members’ interests, compensation, and contributions must be aligned to fully leverage their capabilities and benefit the firm. Another tremendous advantage for firms using directors with high levels of reputational capital could be that those firms will have fewer troubles with malfeasant financial reporting (e.g., Mousavi et al., Reference Mousavi, Zimon, Salehi and Stępnicka2022). Therefore, all things considered, firms who select judicious experts to serve on their boards, and ensure adequate compensation for them, will see and experience elevated levels of firm performance.
Author contributions
All authors contributed equally to this study.
Open access
