Principal Topic

Chief Executive Officers (CEOs) and other top executives in firms have employment contracts that spell out the terms of employment from the start to the termination of an executive’s tenure. Features of these employment contracts include policies affecting recruiting (sign-on bonuses), retention (long term incentives and perks), change of control (special severance provisions), and succession planning (supplemental pensions and post-retirement consulting arrangements) for the CEO. While these provisions provide obvious rewards and security for the CEO, one would hope that the firm would also benefit from the employment contract, but how?

In this study we apply an agency theory model to examine the effect the employment contract has on firm performance. We predict that firms that apply employment contracts that align the interests of the CEO with the firm will achieve higher levels of performance than firms that do not have employment contracts with provisions that align both parties’ interests. In order to test some propositions taken from agency theory, we have selected the biotech industry as the environment from which to collect our data.

Methods

The employment contracts for CEOs from 350 biotechnology firms are examined from data collected from 10-K reports available from the Security and Exchange Commission (SEC) for 1997. Patent counts and patent citations are gathered from the US Patent Office records for 1998 and 1999. Company financial performance data are also gathered from 1998 and 1999 via Compact Disclosure. Control variables such as CEO pay, firm size, and R & D spending will also be utilized in the study.

Implications

The findings of this study revealed that CEO loans to purchase stock were positively related to innovation as measured by patents and patent citations and golden parachutes were negatively related to the innovation measures. There was no relationship between employment contract provisions and firm performance, as measured by annual profits.

CONTACT: David B. Balkin, University of Colorado, College of Business, Boulder, CO; (T) 303-492-5780; (F) 303-492-5962; david.balkin@colorado.edu