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Compensation Structure and the Creation of Exploratory Knowledge in Technology Firms

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

    Given the importance of exploration in a firm’s overall innovation program, scholars have sought to understand organizational factors that give rise to exploration-oriented innovations. We propose theory and empirical evidence that relates firms’ use of financial incentives to their exploratory innovation performance. We expect that a larger proportion of long-term incentives in R&D employee compensation should be positively associated with the creation of exploratory innovation in a firm. In addition, we propose that a higher level of horizontal pay dispersion is negatively associated with the creation of exploratory innovation. We examine innovations reflected in the patents of a unique six-year, unbalanced panel dataset of 94 high-technology firms in the U.S. Empirical results confirm that firms with high level of horizontal pay dispersion have less exploratory patent innovations. However, surprisingly, firms that pay their R&D employees a higher proportion of long-term financial incentives in total compensation have lower level of exploratory innovation. This implies the possibility that popular longterm incentive plans in high-technology sectors (e.g., stock option plans) have failed to achieve their intended goals in practice. We discuss factors that might moderate the negative impact of long-term incentives on exploratory innovation.

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    Bibliographic Info

    Paper provided by Institute of Industrial Relations, UC Berkeley in its series Institute for Research on Labor and Employment, Working Paper Series with number qt2kq4b8qj.

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    Date of creation: 30 Mar 2011
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    Handle: RePEc:cdl:indrel:qt2kq4b8qj

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    Keywords: Business;

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