This paper analyzes the effect of strategic context on managerial compensation design, and the interactive
influence on firm performance for a set of Spanish companies. Specifically, this study examines the performance implications
of the fit between different managerial compensation systems and diverse firm’s strategic orientations—representing various
levels of managerial discretion. Based on a framework combining agency theory and managerial discretion concept, a
research design with both archival and survey data is used to test hypotheses in a sample of 82 firms. The findings offer
sufficient confirmation of theoretical arguments, providing extensions of this research stream for non-U.S. firms. Results
show that firms benefit from the design of managerial compensation systems when they match the managerial control and
risk-bearing requirements imposed by the strategic context. Specifically, risk-encouraging compensation systems are better
for prospector firms—high level of managerial discretion—whereas risk-discouraging compensation systems are better for
defender firms—low level of managerial discretion.