A widely adopted CEO compensation model, designed to drive corporate growth, is paradoxically undermining executive motivation and stifling innovation, according to new research from Virginia Tech. The study scrutinizes "value-based" equity grants—stock awards tied to a fixed dollar amount—demonstrating that these pay structures may inadvertently discourage long-term investments and bold strategic leadership, ultimately hampering shareholder value creation.
Virginia Tech finance scholars Jin Xu and Pengfei Ye conducted an exhaustive analysis of thousands of publicly traded U.S. firms from 2006 through 2022, investigating how varying executive compensation frameworks influence decision-making at the highest levels of corporate leadership. Published in the Journal of Financial and Quantitative Analysis, their findings challenge conventional wisdom about CEO incentives, revealing that value-based grants cap the number of shares executives receive as stock prices rise. This mechanism mutates what should be a performance reward into a dampener of motivation, as CEOs gain less equity upside when their companies perform well.
In their exploration of compensation design, Xu, associate professor at Virginia Tech’s Pamplin College of Business, explains that boards often engineer pay packages to strike a balance between retaining top talent and managing risk exposure. Yet, the value-based approach, he warns, risks alienating the creative and strategic drive critical to long-term innovation. “These compensation plans are well-intentioned to secure stability and minimize volatility,” Xu states, “but they may unintentionally disincentivize executives from pursuing growth initiatives that require patience and risk tolerance.”
The study meticulously contrasts value-based equity grants with share-based grants, illustrating a crucial distinction. While share-based grants award executives a fixed number of shares that appreciate as market prices increase—thus aligning CEO wealth directly with shareholder returns—value-based grants adjust the number of shares downward when stock prices rise, maintaining a constant dollar value. This effectively caps executive upside gains, contravening classic incentive theory, which posits that greater potential reward drives superior performance.
Pengfei Ye, assistant professor at Pamplin College of Business, elaborates on this misalignment: “Under value-based compensation, a CEO’s effective equity stake shrinks with stock price appreciation, paradoxically punishing strong company performance. This structural feature weakens executives’ impetus to drive innovations that can unlock long-term shareholder value.” The research highlights an unsettling correlation: firms heavily reliant on value-based grants disproportionately underinvest in research and development, a cornerstone of corporate innovation and future growth.
The implications bear heavily on corporate governance and strategic leadership. The study finds that even firms with robust governance mechanisms—generally expected to mitigate flawed compensation incentives—fail to fully counteract the adverse effects of value-based pay structures. While stronger boards are more likely to implement value-based grants due to their preference for compensation predictability and executive retention, governance controls alone cannot neutralize the dampening effect on innovation spending.
This paradox creates a palpable tension between the aims of executive retention and the fostering of growth-oriented leadership. Value-based pay structures appeal to boards seeking compensation stability and low volatility, reducing the risk of losing top executives to competitors. However, this risk-aversion may inadvertently encourage executives to “play it safe,” eschewing high-risk, transformative projects in favor of short-term stability, thus diminishing the company’s strategic agility and competitive edge.
Remarkably, the research documents a significant trend over the past two decades: a steady increase in the adoption of value-based equity grants among publicly traded companies. Data reveal that in 2006, 60 percent of firms utilized value-based grants, a figure that rose to 73 percent by 2022. Correspondingly, share-based grants declined from 40 percent to 27 percent, signaling a widespread shift toward compensation models prioritizing predictability over performance incentives.
This shift, while appealing to boards wrestling with talent retention and shareholder expectations for risk management, raises profound questions about its long-term consequences. Ye cautions, “As the corporate landscape gravitates towards value-based compensation, there is a real danger that innovation pipelines will dry up, stalling economic growth and shareholder returns alike.” Such an outcome challenges fundamental assumptions about how CEO pay influences corporate strategy and market success.
The study’s authors propose that this evolving compensation paradigm forces boards into a strategic quandary: whether to favor guaranteed, stable pay that supports retention or to design incentive systems that encourage risk-taking and innovation essential for sustained growth. Their data suggest a hybrid compensation model that integrates both share-based rewards and value-based elements may strike a more effective balance, preserving executive loyalty while fostering visionary leadership.
Moreover, the research underscores that executive compensation is not just a financial engineering tool but a critical lever shaping corporate behavior and strategic priorities. Xu emphasizes that compensation structures must actively “fuel innovation instead of stalling it,” urging boards to rigorously reassess the downstream effects of pay designs on company culture, investment decisions, and ultimately, economic growth.
For investors, the findings offer a clarion call to scrutinize not only the magnitude of CEO pay but its structural composition. Corporations leaning heavily on value-based pay might signal a managerial ethos prioritizing safety and short-term predictability over entrepreneurial risk and long-term shareholder value creation. Understanding these dynamics allows stakeholders to better evaluate a company’s future growth potential and strategic orientation.
In conclusion, the Virginia Tech study illuminates a critical and underappreciated dimension of executive pay, revealing structural flaws in widely used compensation schemes. The rising prevalence of value-based equity grants, while delivering compensation stability, may come at an unforeseen cost to innovation and economic growth. A nuanced reevaluation of CEO pay design could catalyze more balanced incentives, unlocking new pathways for corporate dynamism and shareholder success.
Subject of Research: CEO compensation structures and their impact on executive motivation and corporate innovation.
Article Title: Value-Based CEO Equity Grants
News Publication Date: 23-Jan-2025
Web References:
- Jin Xu, Virginia Tech Pamplin College of Business: https://finance.pamplin.vt.edu/about-us/directory/xu.html
- Pengfei Ye, Virginia Tech Pamplin College of Business: https://finance.pamplin.vt.edu/about-us/directory/ye.html
- Journal of Financial and Quantitative Analysis: https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/abs/valuebased-ceo-equity-grants/9C893A50B7FC3FFBC3B7F91398AA1D8C
References: Xu, J., Ye, P., & Zhang, C. (2025). Value-Based CEO Equity Grants. Journal of Financial and Quantitative Analysis.
Image Credits: Photo courtesy of Virginia Tech.
Keywords: Corporate funding, Corporations, Motivation, Decision making, Colleges, Financial incentives, Finance, Research and development, Scientific approaches, Economic growth, Economics research, Publishing industry, Scientific publishing, Economic decision making, Risk management
