Major Customers’ Long-term CEO Incentives and Supplier’s Performance

This paper examines the relationship between major customers’ long-term CEO incentives and supplier firms’ performance. Long-term equity incentives encourage CEOs to pursue relatively long-time horizons, potentially influencing certain relationships with slanted bargaining power. We predict and find that major customers’ long-term CEO incentives, as measured by CEO incentive for unvested equity, are positively associated with supplier firms’ profitability, partially through a reduced emphasis on myopic price-cuts. However, we also find that customers’ equity incentives appear to decrease suppliers’ operational efficiencies and cost elasticity, implying that suppliers bear burdens of implementing stable resource supplies in exchange for the price protection from the customers. Collectively, our results suggest that customers’ long-term incentives may have multifaceted consequences on suppliers’ performance and operations.