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Exploration versus exploitation in technology firms: The role of compensation structure for R&D workforce

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  • Cui, Victor
  • Ding, Waverly W.
  • Yanadori, Yoshio

Abstract

We investigate the relationship between a firm’s compensation structure and the extent to which its innovation is more exploration versus exploitation oriented. Specifically, we assess two aspects of a firm’s compensation design—horizontal dispersion within job levels and vertical tournament incentives between job levels. A six-year panel of compensation records of 671,028 employees working at 81 U.S.-based high technology firms between 1997 and 2002 are used to construct measures that characterize a firm's pay structure, which are linked to these firms’ patents filed in the U.S. We find that firms with higher-powered tournament incentives in vertical compensation structure report higher fraction of innovation directed towards exploration. Horizontal pay dispersion, on the other hand, shows a negative relationship with the exploration in firms where R&D employees’ age variance is low. In firms where R&D employees’ age variance is high, the negative relationship between horizontal pay dispersion and exploration is muted.

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  • Cui, Victor & Ding, Waverly W. & Yanadori, Yoshio, 2019. "Exploration versus exploitation in technology firms: The role of compensation structure for R&D workforce," Research Policy, Elsevier, vol. 48(6), pages 1534-1549.
    • Handle: RePEc:eee:respol:v:48:y:2019:i:6:p:1534-1549
    DOI: 10.1016/j.respol.2019.03.008
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    Cited by:

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    5. Andreea N. Kiss & Dirk Libaers & Pamela S. Barr & Tang Wang & Miles A. Zachary, 2020. "CEO cognitive flexibility, information search, and organizational ambidexterity," Strategic Management Journal, Wiley Blackwell, vol. 41(12), pages 2200-2233, December.

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    More about this item

    Keywords

    R&D employee; Motivation; Compensation; Pay dispersion; Tournament incentive; Innovation; Exploration and exploitation;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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