Strategic Management Journal Strat. Mgmt. J. (in press) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.560 Received 9 October 2001; Final revision received 1 April 2006 CEO INCENTIVES, INNOVATION, AND PERFORMANCE IN TECHNOLOGY-INTENSIVE FIRMS: A RECONCILIATION OF OUTCOME AND BEHAVIOR-BASED INCENTIVE SCHEMES MARIANNA MAKRI, 1 * PETER J. LANE 2 and LUIS R. GOMEZ-MEJIA 3 1 School of Business Administration, University of Miami, Coral Gables, Florida, U.S.A. 2 Whittemore School of Business and Economics, University of New Hampshire, Durham, New Hampshire, U.S.A. 3 College of Business, Arizona State University, Tempe, Arizona, U.S.A. Building on the agency view of corporate governance, we propose that technology-intensive firms use both outcome and behavior-based performance criteria for rewarding CEOs. Using a sample of 206 firms from 12 U.S. manufacturing industries, we find that as technological intensity increases CEO bonuses are more closely linked to financial results and that total CEO incentives are associated with two indicators of desirable innovation behaviors: invention resonance and science harvesting. Invention resonance refers to the impact a firm’s inventions have on other firms’ inventions, while science harvesting reflects a firm’s commitment to scientific research. As technological intensity increases, aligning bonus with financial results, total incentives with invention resonance, and total incentives with science harvesting predict firm market performance. Copyright  2006 John Wiley & Sons, Ltd. In the competitive environment of the 21st cen- tury, ‘the most important force of all is the grow- ing power of ideas ... the power, prestige, and money will flow to the companies with indispens- able intellectual property’ (Coy, 2000: 77). The high-technology sector plays a pivotal role in this ‘creative economy’ and has become the major source of employment and productivity growth. The Bureau of Labor Statistics estimates that the percentage of workers employed by manufacturing Keywords: executive compensation; performance; inno- vation; technology; science ∗ Correspondence to: Marianna Makri, School of Business Administration, University of Miami, Jenkins Building, 414 L, 5250 University Drive, Coral Gables, FL 33146, U.S.A. E-mail: mmakri@miami.edu industries has fallen below 20 percent, the lowest level since 1850. On the other hand, the pro- portion of workers in the computer, electronics, biotechnology, pharmaceutical, and other research- intensive industries has more than tripled since the early 1980s. The rising importance of intellec- tual property is reflected in an astonishing statistic: the U.S. Patent and Trademark Office handed out 70 percent more patents in 1999 (about 170,000) than it did just a decade earlier, surpassing the rate of increase of the prior 40 years combined (Coy, 2000). The Office of Science and Technol- ogy estimates that more than half of economic growth during 1945–2002 is attributed to inno- vations within the high-technology sector (Leary, 2002). Further, since 2000, the 10 largest U.S. Copyright  2006 John Wiley & Sons, Ltd.