Inside the black box: The contrasting effects of tmt long-term incentives on interest alignment

We develop a comprehensive, multi-theoretical model to examine the interest alignment properties of long-term incentive pay. Specifically, we examine the direct and indirect (through managerial risk behavior) effects of TMT long-term incentives on shareholder return. As expected, the level of aggregate long-term incentives held by the TMT exhibited a positive influence on shareholder return. Results also show that long-term incentives increased acquisition behavior; however, this effect was attenuated by the level of dispersion in TMT long-term incentives. Most interestingly, contrary to agency theory assumptions, our findings show that acquisition behavior exhibited a negative effect on shareholder return. Thus, while long-term incentives increased risk behavior, acquisitions decreased shareholder return. Taken together, we argue that these findings advance compensation theory and research by offering a more comprehensive theoretical understanding of the interest alignment properties of long-term incentives. In addition, these results highlight the necessity of examining both proximal (specific behaviors) and distal (performance measures) effects of long-term incentives in compensation theorizing and research.