Does money make the world spin?
The effects of executive compensation and share
ownership on organizational ambidexterity
By
Daan Peeters Weem S2297574
h.j.d.peeters.weem@student.rug.nl
Master’s Thesis, MSc Business Administration: Strategic Innovation Management
June 2018
Supervisor: prof. dr. J.D.R. Oehmichen Co-assessor: P.J. Steinberg, Ph.D.
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ABSTRACT
Using the agency theory of the firm as a theoretical lens, this study aims to contribute to the managerial and scientific field of examines the effects of executive compensation and share ownership on the concept of organizational ambidexterity. Through an empirical analysis of US high-technology firms, I find outcomes that contradict extant literature on executive compensation. Contrary to my expectations, I found that executive compensation is actually negatively related to organizational ambidexterity. In addition, ex ante share ownership turns out to be a positive moderator on the aforementioned effect. These results suggest an important misconception of the notion that aligning incentives with performance objectives is a successful method in the face of pursuing organizational ambidexterity.
Keywords: Organizational ambidexterity, exploitation, exploration, agency theory of the firm,
executive compensation, share ownership, innovation
TABLE OF CONTENT
1 ABSTRACT…………...………1
2 TABLE OF CONTENT.………...1
3 INTRODUCTION…………..………...2
4 LITERATURE REVIEW AND HYPOTHESES………..……….4
5 DATA AND METHODS………..………9
6 ANALYSIS AND RESULTS………...………..…….12
7 DISCUSSION AND CONCLUSION………...………..15
8 REFERENCES………....20
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INTRODUCTION
With an expected gross domestic product growth of more than 3 per cent in 2018, the economic climate is at its best since 2007 (CPB, 2017). However, increasing economic activity also brings along increased competition for organizations. In these competitive markets, changing and adapting is of even greater importance (De Clercq, Thongpapanl and Dimov 2014). Effective change, however, is not easy to establish and causes many firms to fail (Christensen, 1997).
One aspect of organizational change that is vital to managing disruptive change is to excel at both exploitative and explorative changing and learning (De Clercq et al, 2014; O’Reilly & Tushman, 2004). Excelling at both exploiting, which entails “improving current operations” (De Clercq et al, 2014:191), and exploring, which focusses on undiscovered opportunities and more experimental ways of doing business (March, 1991), is called ‘Organizational Ambidexterity’, derived from the Roman word that represents the human ability to “use both hands with equal skill” (Simsek, 2009:598).
Although not being the first, it was March (1991) who propelled the concept of organizational ambidexterity into the spotlight of academic business research (Raisch and Birkinshaw, 2008). Ever since, exploitation, exploration, and organizational ambidexterity have gained extensive attention from business researchers, leading to various streams of research. A frequently treaded-down research avenue has associated the concepts with (dynamic) capabilities (e.g. Danneels, 2011; O’Reilly & Tushman, 2007; Leonard-Barton, 1992). Another frequently-used theoretical lens uses structural components and coordination mechanisms to attempt to understand organizational ambidexterity (Birkinshaw and Gibson, 2004; Jansen, Van den Bosch, and Volberda, 2006; Jansen, Tempelaar, Van den Bosch and Volberda, 2009). Finally, many researchers focused on understanding the right balance or interaction between exploitation and exploration that spurs the highest rates of organizational ambidexterity, and ultimately, firm performance (e.g. Chang, Hughes, and Hotho, 2011; Tushman and O’Reilly, 1996; Benner and Tushman, 2003).
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conflicting activities of exploiting and exploring that call for paradoxical solutions which should establish “short-term efficiency and long-term innovation” (Raisch & Birkinshaw, 2008:380). Moreover, Simsek (2009:618), argues that “organizational ambidexterity is not necessarily concerned with simultaneously pursuing exploitation and exploration to their maximum per se, but rather involves a dynamic balance that stems from purposefully steering and prioritizing each dimension to its inherent optimum as conditions demand”.
Compensation has been regarded as such a mechanism, having the ability to steer managers’ attention to certain specific issues, (Eisenhardt 1989; McGuire, Oehmichen, Wolff, and Hilgers, 2017) like fostering exploration or exploitation. However, research that examines this in relation to organizational ambidexterity, is scarce. This can be regarded as a missed opportunity, since this form of incentive-based compensation is ubiquitous (McGuire et al, 2017) and regarded as a common tool to diminish the agency problem between top management and shareholders (Hermalin and Weisbach, 1991). A better understanding of the dynamics between ambidexterity and compensation can therefore greatly enhance our overall understanding on how to foster organizational ambidexterity.
This study is grounded in the agency theory of the firm (e.g. Jensen & Meckling, 1976), as management is often regarded as the entity that predominantly drives ambidexterity (Raisch & Birkinshaw, 2008), whilst this entity is susceptible to agency costs (Eisenhardt, 1989). This makes managers a key subject of interest where the Agency theory can act as an important tool to understand the underlying mechanisms.
Firstly, this study attempts to contribute to this Agency theory by applying it to the organizational ambidexterity context. Secondly, it attempts to contribute to the organizational ambidexterity context by empirically investigating how executive compensation can contribute to the fostering of ambidexterity. Finally, it incorporates how long-term-oriented compensation (i.e. stock rewards), may strengthen or weaken the relationship between executive compensation and organizational ambidexterity. This will all be guided by the following research question:
RQ: How does executive compensation affect the degree of organizational ambidexterity?
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using data that spans over 12 years and involves 254 firms from 4 high-technology industries Finally, I conclude by discussing the results, implications, limitations, and suggestions for future research.
LITERATURE REVIEW AND HYPOTHESES
Agency theory of the firm
In order to precisely comprehend the dynamics of organizational ambidexterity and executive compensation, the Agency theory of the firm is used as a theoretical lens. Early foundations of the Agency theory stem from as early as the late 1700s when Adam Smith wrote in his famous work ‘The Wealth of Nations’: […] it cannot well be expected, that they [i.e. the managers of joint-stock companies] should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own” (Adam Smith, 1776:700). It captures the central connotation of the theory adequately: The Agency problem arises as managers, dubbed agents, have goals that conflict with owners of the firm, dubbed
principals, or it is difficult for the principal to monitor whether the agent acted to the principals
wishes (Eisenhardt, 1989). Causes of this tension are information asymmetry and the previously mentioned conflict of interests (Wiseman, Cuevas-Rodríguez & Gomez-Mejia, 2012).
The leeway that the principal-agency relationship provides, leaves room for the agent to engage in opportunistic behavior that is suboptimal to the principal, but optimal for the agent (Jensen, 1976). However, in the past 300 years, the theory has been studied intensively and the later added second problem is much more useful for this study.
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entails focusing on new markets, products, or processes that have not proven themselves to be economically viable yet and that payoffs, if at all, occur predominantly in the long run (Benner & Tushman, 2003). This threat is even more pressing in dynamic environments (Chang et al, 2011). Outcome uncertainty for exploration, and short-term payoffs for exploitation, cause many firms, however detrimental in the long term, to focus on the latter. In other words, excessive focus on exploitative activities can be seen as suboptimal decision-making from the perspective of the firm and its owners.
According to the theory, the principal attempts to keep interests of the principal and agent aligned through monitoring and interest alignment (Tosi, Brownlee, Silva and Katz, 2003). It is important to acknowledge upfront that the narrow focus of the agency theory is an over-simplification, especially because the theory neglects to incorporate the social aspect of decision making, in particular the connotation that “economic behavior is shaped by social mechanisms not just at the margin, but also at the core” (Wiseman et al, 2012:206). However, although being an oversimplification of the truth, agency theory still “provides an important analytical tool to analyze any situation that involves delegation independent of particularistic institutional context” (Wiseman et al, 2012:204). Further discussion on this important limitation will be discussed at the ‘Limitations’ section
Organizational ambidexterity
Organizational ambidexterity is defined as an organization’s ability to simultaneously combine exploitative innovation and explorative innovation (Tushman and O’Reilly; Jansen et al, 2008). Originally emerged in the organizational learning literature, ambidexterity entailed the recombination of existing knowledge and technology (i.e. exploitation), and exploring new knowledge domains (i.e. exploration) (March, 1991). Accordingly, organizational ambidexterity enables firms to overcome structural inertia due to excessive focus on exploitative innovation equally as it refrains them to pursue exploration without reaping the (financial) gains they potentially spur (Levinthal and March, 1993).
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short-term profitability due to the exploitation of current technology in favor of future technologies, while exploration is achieved by the opposite (Raisch and Birkinshaw, 2008).
With the realization that, although being a complex process, fostering both kinds of innovation is indeed possible for some firms, an increasing amount of research examines the factors that can be attributed to organizational ambidexterity. Current literature includes structural factors (e.g. Jansen et al, 2006), contextual factors (e.g. Birkinshaw and Gibson, 2004), and leadership characteristics (Smith and Tushman, 2005; Lubatkin, Simsek, Ling, and Veiga, 2006). The role of the antecedent of executive compensation, however, remains unexplored.
Organizational ambidexterity and executive compensation
The importance of pursuing both explorative and exploitative innovation has been emphasized upon for years (e.g. March, 1991; O’Reilly and Tushman, 2004; Jansen et al, 2006). However, regarding the exact mechanisms that drive organizational ambidexterity, much more clarity has yet to be given (Jansen et al, 2006). Yanadori and Marler (2006) already found a link between a firm’s innovation strategy and their compensation systems in the sense that firms adapt their compensation structures to fit their innovation strategy. Their research showed that, through their compensation strategy, firms explicitly tried to focus the attention of their employees towards short-term or long-term firm performance, depending on whether the innovation strategy of the corresponding firms focused on either one of the two. The research, however, did not examine whether the compensation structures effectively influenced these strategies. Moreover, the research operationalized innovation strategies as focusing on either short-term firm performance (fitting exploitation) or long-term firm performance (fitting exploration). Firms that focus on both (i.e. organizational ambidexterity) were not identified. Agency theory supports their research by positing that these attempts are effective in terms of redirecting firm attention through compensation (Tosi et al, 2003). Finally, my research efforts will examine whether these mechanisms also effectuate the desired innovation through organizational ambidexterity.
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salary predominantly acts as a base and outcome-based stock-awards form the incentives for executives to reach long-term goals (Mehran, 1995). Because exploration and exploitation each require such a different focus (e.g. Birkinshaw and Gibson, 2004; Jansen et al, 2006; Chang et al, 2011), it is expected that both behavior-based compensation and outcome-based compensation are needed in order to facilitate ambidexterity.
Conceptually speaking, it is likely that behavior-based compensation fosters exploitation. This is because this form of compensation emphasizes short-term goals (Yanadori and Markler, 2006), which corresponds with the short-term profitability prospects that are associated with exploitation (Gibson and Birkinshaw, 2004), aligning the interests of the principal and the agent (Tosi et al, 2003). Following the same reasoning, exploration is expected to be fostered by outcome-based compensation, as the long-term profitability prospects of this type of innovation (Gibson and Birkinshaw, 2004) fit with the long-term focus that this form of compensation emphasizes upon (Mehran, 1995).
However, the majority of the extant academic research has focused on either outcome-based compensation or behavior-outcome-based compensation, making it difficult to comprehend how the two forms of compensation interplay. In addition, behavior-based compensation has shown mixed results on short-term and long-term firm performance in the academic literature. For example, Eisenhardt (1989:62) stated that “when outcomes are measured with difficulty, outcome-based contracts are less attractive”. Because there are no concrete standards as to which levels of ambidexterity are most adequate for certain firms, this would point towards the use of salaries and bonuses. In addition, where cooperation between different executives is needed, which is common in situations concerning top management, weak incentives with regard to outcomes are more effective than strong incentives (Roberts, 2010; Pepper and Gore, 2015).
There is also research that advocates against the use of behavior-based compensation. First, because this form of compensation misaligns the goals of the principal (shareholders), pursuing long-term firm performance through ambidexterity; and the agent (executives) (Jensen and Meckling, 1976), hesitant about ambidexterity due to term losses that decrease short-term managerial performance. Next to this, agency theory argues that these behavior-based incentives are inefficient under outcome uncertainty (Eisenhardt, 1989), and organizational ambidexterity is inherently faced with outcome uncertainty (Gibson and Birkinshaw, 2004).
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Hypothesis 1: Executive compensation is positively related to organizational ambidexterity.
Organizational ambidexterity and relative share ownership
Remuneration through equity-based compensation is used to encourage managers to optimize their risk-taking behavior (Low, 2006). By paying managers in stock rewards or options, firms tie the value of (part of) the managers’ compensation to long-term firm performance as higher firm performance drives up stock value (Gomez-Mejia, Tosi, and Hinkin, 1987). Indeed, according to classic agency theory, incentive-aligning mitigates agency costs (Eisenhardt, 1989). However, accumulated stock awards lead to a larger relative ownership of the manager over the firm. This makes the relationship between managers’ compensation and their desired behavioral responses more complex due to endogeneity issues resulting from the greater relative ownership (Low, 2006).
Ownership of managers over a firm has shown mixed results on decision making in the academic literature, although not abundantly prevalent (Gedajlovic, Cao and Zhang, 2012). There is a stream that advocates that share-owning managers are better able to steer their previously-made decisions, monitoring and correcting them in the face of inefficiencies (Gedajlovic, Lubtakin and Schulze, 2004). In this respect, managers would be better able to adjust their previously-made decisions to enhance the outcomes in such a way that higher levels of ambidexterity are achieved. Others stipulate that it is the direct financial interest aspect that stock ownership causes to be closely involved in ensuring that undertaken projects lead to competitive advantage (Carney, 2005), which corresponds with classic agency theory in terms of interest alignment (Jensen and Meckling, 1976). However, it is important to acknowledge that these studies were conducted with a focus on SMEs, which have substantial differences with regard to larger firms (Gedajlovic et al, 2012).
The research that stipulates that ownership is detrimental to decision-making, is centered around the risk-taking component. For example, Hirshleifer and Suh (1992) found that larger stakes in a firm can cause managers to work harder, but simultaneously affect their attitudes toward project risk, decreasing risk-taking. Low (2006:488), finds a similar result, dubbing the risk aversion in this form a “serious agency problem”.
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theory. Where the agency costs (caused by risk concerns) would otherwise be mitigated due to prospects of a larger share of stock ownership through equity-based compensation, this effect will be weakened by a large amount of shares (Low, 2006). The interest alignment, caused by a promise of more wealth in the presence of more risk-taking (Wiseman et al, 2012) will simply have a weaker effect . Therefore, I hypothesize:
Hypothesis 2: The degree of influence that Executive compensation has on
organizational ambidexterity is negatively moderated by the relative amount of shares owned by the executives.
The hypotheses mentioned above lead to the construction of the following conceptual model:
Figure 1: Conceptual model
DATA AND METHODS
Sample and data collection
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(2016), which comprises 254 US firms in four high-technology industries (SICs: 2834, 7370, 7372, 7373) over a timeframe set between 2004 and 2016. Afterwards, I merged the dataset together with the ExecuComp data. After accounting for the missing datapoints due to the merging of two separate sets, this longitudinal panel data set had a total of 1.887 observations for 254 firms over 12 years. Uotila, Maula, Keil, and Zahra (2009) emphasized on the importance of using longitudinal panel data for research that attempts to explain the effect on strategic choices as it controls for endogeneity and unobserved heterogeneity.
Measurement
Dependent variable
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Independent and moderating variables
Executive compensation
The main independent variable incorporated in this study is executive compensation. For the measure of this variable, I utilized Yanadori and Marler’s (2006:563) of total pay, which included “virtually all forms of monetary (e.g. base pay, profit sharing awards) and non-monetary compensation (e.g. stock awards)”. This operationalization reflects the one used in the study of Balkin, Markman, and Gomez-Mejia (2000). More specifically, my compensation data entailed the sum of the annual base pay (i.e. salary), cash bonuses, other bonuses, long-term incentive plan (LTIP) payouts, restricted stock grants, and stock/options, all displayed per thousand US dollars. The equity-based rewards were valued using the Grant Date Fair Value. Due to the fact that this compensation data was retrieved on individual-level basis, and the unit of analysis of this study (and the organizational ambidexterity data) is on firm-level basis, the compensation data was aggregated to firm-level: The data was summed and then divided by the amount of executives in order to get the average firm-level compensation for each company for the years 2004-2016 (given that there were no missing years for a given firm). Because the distribution of executive compensation is skewed (Yanadori and Marler, 2006), I applied a logarithmic transformation.
Relative amount of shares owned
The main moderator in this study is the relative amount of shares owned. I employed Gedajlovic et al.’s (2012) operationalization of management shareholdings, simply taking the percentage of shares owned by the firm’s executive, calculated by dividing the absolute amount of shares by the total amount of shares of the firm. Similarly to executive compensation, this entails an individual-level variable. In order to make the variable compatible to the ambidexterity variable, I aggregated it by summing the relative amount of shares for each executive and dividing it by the total amount of executives in order to obtain the firm-level variable.
Control variables
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“differences in financial performance could affect the strategic orientations of firms”. Additionally, the natural logarithm of total capital as control variable was used, as it is skewed. As R&D expenses may account for organizational ambidexterity differences, I added the natural logarithm of R&D expenses divided by total assets as a control variable, similarly to the study of Uotila et al (2009). Next, Tobin’s Q was employed to control for performance effects. I favored this market-based measure over accounting-based measures of performance based on the argument of Uotila et al.’s (2009) research which entails that these market-based measures capture both short-term performance and long-term performance prospects in a single performance variable, which fits the time horizon of this study to a larger extent. Tobin’s Q is calculated by dividing the market value of assets by the book value of the assets. Afterwards, I controlled for firm size effects by calculating the total number of employees. A natural logarithm was included “because larger units may have more resources yet may lack the flexibility to explore,” (Jansen et al, 2006:1667). Finally, year dummies were included to account for unobserved time effects (Yanadori and Marler (2006).
ANALYSIS AND RESULTS
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Table 1: Descriptive statistics and correlation matrix
Variables Mean S.D. (1) (2) (3) (4) (5) (6) (7) (8) 1 Organizational ambidexterity 0,92 0,90 1,00 2 Executive compensation* 9,18 1,07 0,02 1,00 3 Relative amount of shares owned 0,05 0,10 -0,07 0,06 1,00 4 Tobin’s Q 2,88 1,94 0,02 0,07 0,09 1,00
5 Return on assets (ROA) 5,79 16,16 0,07 0,07 0,08 0,23 1,00
6 Firm size* 7,74 1,69 0,25 0,57 -0,07 -0,12 0,07 1,00
7 Total capital* 13,04 1,07 0,19 0,61 0,01 -0,07 0,07 0,59 1,00 8 R&D expenses w.r.t.
total assets* 0,80 0,17 0,18 0,59 -0,02 -0,02 0,08 0,58 0,46 1,00
Notes: N = 1.194. Variables with an asterisk (*) are logarithmic transformations.
Hypothesis testing
The above-mentioned information about the variables was used to test the two hypotheses that are constructed in this study. In order to test hypothesis 1: Executive compensation is positively related to organizational ambidexterity, an Ordinary Least Squares (OLS) test was calculated, exhibited under model 1 in table 2. The results indicated a significant regression equation with F(16,1302)= 17,13, p < 0,001, with adjusted R²=0,164. Although the findings exhibit a significant effect, the relation is actually negative (b = -0,242,
p < 0,001). This suggests a decrease in organizational ambidexterity equal to b for every increase in executive compensation. The afore-mentioned results provide evidence to reject
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Table 2: Results of the regression analyses
Model 1 Model 2 Model 3
b (s.e.) b (s.e.) b (s.e.)
Independent variables
Executive compensation† -0,242*** (0,034) -0,253*** (0,036) -0.253*** (0.034)
Relative amount of shares owned† -0,111*** (0,024) -0,111*** (0,019)
Control variables
Tobin’s Q 0,031* (0,012) 0,038** (0,013) 0,038** (0,012)
Return on Assets (ROA) 0,002 (0,001) 0,003 (0,001) 0,003* (0,001)
Company size 0,307*** (0,020) 0,300*** (0,020) 0,296*** (0,021)
Total capital -0,053*** (0,013) -0,054*** (0,014) -0,054*** (0,014)
R&D expenses -0,003 (0,010) -0,011 (0,011) -0,011 (0,010)
Interaction effects
Executive compensation * relative amount of shares owned, H2†
-0.040* (0,017) -0,040** (0,014)
Adjusted R-squared 0,164 0,175 0.230
Notes: N = 1.189. † values are centered. Year dummies are included in the regressions, but not reported. * p < 0,05, ** p < 0,01, *** p < 0,001.
move in the inferred direction, causing the relationship between executive compensation and organizational ambidexterity to become more negative, as illustrated in figure 2. However, hypothesis 2 was constructed under the assumption of hypothesis 1 having a positive effect. Therefore, although the inferred direction is the same, the underlying relationships are not and hypothesis 2 is rejected as the results indicate a positive interaction effect instead of a negative interaction effect. Further discourse on the this result will be held under the discussion section.
Robustness checks
In order to increase the robustness of my models, I executed a robustness check. A
robustness check entails the analysis of the behavior of the regression coefficients under the
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Figure 2: Interaction plot for hypothesis 2
hypothesis 2. The results indicate the presence of heteroscedasticity (X²(110) = 270,35, p < 0,001). To account for this, I re-executed the OLS of hypothesis 2 with the use of robust standard errors, found under model 3 in table 2. The results of this OLS are similar to the initial regression, (b = -0,040, p <0,01).
DISCUSSION AND CONCLUSION
The academic literature is making great progress in unravelling the unknown domains behind the concepts of organizational learning, exploitation, exploration, and organizational ambidexterity. Since March’s (1991) study, our understanding of the concepts has increased significantly. The inclusion of one of the most widely used mechanisms to steer firm behavior – compensation – (Jerez‐Gómez, Céspedes‐Lorente, and Valle‐Cabrera, 2005) however, was not part of the literature brought forward. This study therefore offers, a first peak behind the curtains of the mechanisms revolving around organizational ambidexterity and executive compensation.
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nature of the concept itself, where, due to the paradoxical natures of exploitation and exploration, a levelling out effect may occur for the two compensation strategies (behavior-based compensation and outcome-(behavior-based compensation). Instead of each fostering the form of innovation that it is intended to have an effect on, the compensation strategies may have a deteriorating effect on the form of innovation that it was not intended to affect (i.e. behavior-based compensation deteriorating exploration and outcome-behavior-based compensation deteriorating exploitation). This can be illustrated through the attention-based view (ABV), which is in turn an adaption on the widespread resource-based view of the firm (Ocasio, 1997). In short, ABV “starts with the well-established premise that what decision makers do is a function of where they allocate their limited attention” (Barnett, 2008:609). Managerial attention, defined as being a major limited firm resource, subject to bounded rationality, is driven by a variety of organizational factors and is therefore context-dependent (Ocasio, 1997). The complexity that organizational ambidexterity goals introduce may further limit the already restricted information processing capacity and in turn cause a cognitive overload, which may lead to suboptimal decision-making as not all factors are taken into account (Ocasio, 2011). This gives an alternative explanation for the relation between executive compensation and organizational ambidexterity, explaining that this relationship is not only affected by different forms of compensation driving exploitation and exploration as explained through agency theory, but also distorted by a range of cognitive factors.
A second explanation for the negative association found may lie in the question whether the lack of social aspects in the agency theory of the firm accounts for the misfit between agency and compensation theory with relation to organizational ambidexterity. Wiseman et al (2012) highlighted the social embeddedness of executive decisions, emphasizing on the implications of formal recognition from actions, intrinsic motivation over extrinsic motivation (by compensation), and cultural factors that drive agents’ motivation to serve the principal(s). In their research, they touch upon the fact that the self-centered logic that compensation introduces through the agency perspective may actually promote a transactional relationship between the agent and principal, and eventually be detrimental to organizations, (Wiseman et al, 2012). In this way, executive compensation is expected not to align interests between the principal and agent, but, in fact, to misalign these interests.
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although the results moved into the inferred direction, the underlying relationship was not as predicted. The argumentation that entailed that relative share ownership can be detrimental to organizational ambidexterity, however, does seem to hold intuitively, but in order to be able to validate this assumption, additional research should be conducted.
This conclusion does not entail that it is meaningless to discuss the results. To the contrary, this study provides evidence that owning a large portion of a firm’s shares can increase the negative impact that executive compensation has on organizational ambidexterity. One explanation could be that the already complex task of achieving organizational ambidexterity (Jansen et al, 2008), is only further increased in terms of personal complexity for executives as their personal stake in the firm and firm outcomes increases. The increased complexity may increase the chances of the afore-mentioned cognitive overload that inhibits decision-making that fosters organizational ambidexterity (Ocasio, 2011).
Another explanation for the result could be that indeed, as predicted, the risk component plays an important role (Hirshleifer and Suh, 1992). The ownership of shares may affect the attitudes toward project risk as the need to avoid achieving negative outcomes, commonly associated with exploration projects (Raisch & Birkinshaw, 2008), increases with a larger share of stock ownership. Even under the unexpected results, this reasoning may hold true. However, instead of weakening the interest alignment between the principal and the agent under the assumption of a positive effect of executive compensation on organizational ambidexterity, larger share ownership may strengthen the now expected interest misalignment caused by executive compensation.
Limitations and future research
This study has various important limitations. First of all, even though the ideas presented may apply to a larger variety of industries, they have been tested on the following (high-tech) industries: pharmaceutical preparations (SIC: 2834), computer programming, data processing, and other computer related services (SIC: 7370), prepackaged software (SIC: 7372) and computer integrated systems design (SIC: 7373). Although representative for high technology industries, the research is less so for low-technology industries. An interesting future research avenue may therefore be to apply the ideas from this paper to other industries, especially those characterized as being low-tech.
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accounting for the surprising results. Careful steps in incorporating more and more different socio-economic and environmental factors (e.g. government regulation) could be valuable increasing our understanding. This research should therefore act as a catalyst that spurs various research avenues in understanding the whole context. A good starting point could be by incorporating the social agency theory by Wiseman et al (2012), but other theories that incorporate social and cognitive aspects (e.g. the attention-based view) could be suitable for these purposes.
As exploitation and exploration are such paradoxical concepts, another possible future avenue for research could be found by narrowing the scope of this research and solely focusing on how exploration and exploitation separately respond to different forms of compensation structures. This can potentially enhance our understanding of how the separate mechanisms of exploitation and exploration work.
Furthermore, this study used top executives as unit of analysis for driving ambidexterity, as it builds on the notion that top executives are predominantly drivers of organizational ambidexterity (e.g. Raisch and Birkinshaw, 2008). However it might give fruitful new insights if future research would also assess how compensation of lower managerial levels affect the studied context.
Finally, although CATA has proved its usefulness for several studies (e.g. Uotila et al, 2009, Heyden et al, 2015), the algorithm it works with is not yet 100 per cent error free (McKenny et al, 2016). I therefore extend the notion of Jansen et al (2006) that complementary measurements of ambidexterity may further enhance the validity of this study, especially if those are related to my measurements.
Implications for research
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between SMEs and larger firms in relation to organizational ambidexterity (e.g. Chang et al, 2006; De Clercq et al, 2014).
This study also contributes to the already rich body of literature on the agency theory of the firm, but, due to the surprising results, does so by questioning its impact on the organizational ambidexterity context. Although this may sound quite negative, defining the borders of applicability of theories can actually also contribute to the academic literature. In addition, the call for a broader variety of factors incorporated in the agency theory (e.g. social agency theory) could enhance the scope of applicability.
Implications for managers
The results of this study also have implications for managers. First of all, it gives insights in how to incorporate outcome-based compensation and behavior-based compensation, especially in pursuing organizational ambidexterity. The results clearly suggests that managers should carefully think about how to structure their compensation strategy, emphasizing to not blindly follow the intuitive notion that the temporal horizons of compensation and innovation strategy should be aligned. In contrast with Yanadori and Marler’s (2006) research, I found that managers should actually refrain from tying compensation to ambidexterity as it could be detrimental for, at the very least, firms that pursue organizational ambidexterity. Before additional research can confirm in which cases the relation between compensation and ambidexterity is negative specifically, managers should exhibit prudent attitudes toward compensation strategies.
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Appendix A: Description of variables used
Variable Description Notes
Dependent variable
Organizational ambidexterity
Degree of organizational ambidexterity. Derived from MD&A filings. Calculated the amount of words through CATA, revealing underlying themes.
Obtained pre-calculated. Calculation: ((exploitation count/total word
count)*1000)*((exploration count/total word count)*1000) Independent variable
Executive compensation
Total executive compensation, consisting of: salary, cash bonuses, other bonuses, LTIP payouts, restricted stock grants, and stock (options). Displayed in units of 1000 USD.
Aggregated to firm level (sum of compensation every executive per firm, divided by the amount of executives per firm. Additionally: natural logarithmic transformation Moderating variable
Relative amount of shares owned
The percentage of shares owned by managers, relative to the total amount of shares.
Aggregated to firm level by summing the individual-level percentages and dividing it by the total amount of executives per firm
Control variables Tobin’s Q
Market-based measure to assess firm performance.
Calculation: (Market
capitalization + total assets – total shareholder’s equity)/total assets
Return on Assets (ROA) Financial firm performance measure Calculation: Net income before
preferred dividends * (1 – tax rate)/Last year’s total capital * 100
Firm size Firm size measure, based on the amount of
employees
Adjusted by a natural logarithmic transformation
Total capital Total capital per firm Obtained pre-calculated.
Year dummies (2004-2016) Dummy variables that account for year
effects
Calculation (per relevant year): 1 = relevant year; 0 = not the relevant year
R&D Expenses Measures to account for R&D expenses
differences
