The Effect of Board of Directors’ IT Awareness on CIO Compensation and Firm Performance

Chief information officers (CIOs) play increasingly strategic roles in firms in this competitive global economy, which is now largely powered by information technology (IT). However, research has shown a lack of board of directors’ oversight on CIO‐ and IT‐related issues. Drawing on agency, resource dependence, and alignment theories, we investigate the effect of board of directors’ IT awareness on CIO compensation structure and firm performance. We conduct cross‐sectional time series analyses of data collected from various sources. Our study underlines three important findings. First, we show that some commonly known executive compensation determinants, such as individual characteristics and governance structure, do not have significant effects on CIO compensation structure. Second, with regard to CIO compensation structure, firms respond to increasing information asymmetry differently according to the level of IT awareness of their boards. Finally, firms perform better when their boards have higher levels of IT awareness, and this positive effect of IT awareness is considerably larger in IT intensive industries. Overall, our study provides empirical support for the important role of boards’ IT awareness in shaping CIO compensation and improving firm performance. Our results suggest that boards with functional area knowledge–or higher IT awareness in this case–can more effectively monitor and better incentivize executives, and consequently lead to better firm performance.