The Interrelationships between Information Technology Expenditures, CEO Compensation and Firm Value*

CEOs and their management teams decide how much a firm will spend on IT. Though managers make IT spending decisions with the intent of generating value, such benefits are risky and not guaranteed (Dewan et al. 2007). While CEOs may perceive that IT spending could translate into competitive advantage and increase productivity, they also realize that IT expense will reduce current net income and contain non-diversifiable risks. Our results suggest that boards of directors consider IT spending an important contribution to the firm’s investment opportunity set and consequently provide incentives for CEOs to invest in IT. First, we find that IT expenses are associated with higher ratios of equity compensation, which suggests that boards of directors understand the uncertainty and risk profile of some IT spending and therefore tie CEO compensation to future outcomes by placing greater weight on equity compensation. Second, we find that IT expenses are unrelated to CEO cash compensation, which suggests that BODs shield CEO cash compensation from the income-decreasing effects of IT spending. Third, we find that firms with both higher IT spending and higher ratios of equity to total CEO compensation have higher market values. We conclude that the synergistic relationship between IT spending and CEO equity compensation impacts firm market value.