Unintended Consequences of Outcome Based Compensation – How CEO Bonuses, Stocks and Stock Options Affect their Firms’ Patent Litigation

Papageorgiadis, Nikolaos ORCID: 0000-0002-2983-5218, Procopiou, Andreas ORCID: 0000-0001-6289-9734 and Sofka, wolfgang ORCID: 0000-0003-1598-6127 (2023) Unintended Consequences of Outcome Based Compensation – How CEO Bonuses, Stocks and Stock Options Affect their Firms’ Patent Litigation. Research Policy, 52 (8). p. 104816.

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Official URL: http://dx.doi.org/10.1016/j.respol.2023.104816

Abstract

Enforcing a firm’s patents is crucial for defending its competitive advantage. CEOs are central for making these strategic decisions but we know little about how their individual incentives shape their decision-making. We integrate theory from outcome-based CEO compensation designs into models explaining firms’ decisions to become plaintiffs in patent litigation. Based on how compensation shapes time horizons and risk-taking of CEOs, we predict that CEO compensation tied to stock increases the firm’s likelihood to enforce patents, while bonuses and stock options reduce it. Further, we reason that the tenacity of patent disputes in an industry creates a boundary condition for the effects of CEO compensation because they curtail the degree of agency that CEOs have for incorporating their personal incentives when making litigation decisions for the firm. We test these hypotheses for 2,302 US firms with 4,420 different CEOs and 3,451 patent litigation cases between 1997 and 2015 and find support for all hypotheses with the exception of the boundary condition for stocks as CEO compensation. These findings advance existing theory on firms’ decision-making on patent litigation by explicating how firm and CEO incentives can diverge with direct consequences for the likelihood of litigation to occur.

Item Type:	Article
Uncontrolled Keywords:	Patent enforcement, Patent litigation, Compensation, Stock options
Divisions:	Faculty of Humanities and Social Sciences > School of Management
Depositing User:	Symplectic Admin
Date Deposited:	17 May 2023 08:52
Last Modified:	16 Aug 2023 10:15
DOI:	10.1016/j.respol.2023.104816
Related URLs:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3170410