Compensation Structure and the Creation of Exploratory Knowledge in Technology Firms
AbstractGiven the importance of exploration in a firmâ€™s overall innovation program, scholarshave sought to understand organizational factors that give rise to exploration-oriented innovations. We propose theory and empirical evidence that relates firmsâ€™ 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 InfoPaper provided by Institute of Industrial Relations, UC Berkeley in its series Institute for Research on Labor and Employment, Working Paper Series with number qt4f7671kn.
Date of creation: 01 Feb 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-28 (All new papers)
- NEP-ENT-2012-03-28 (Entrepreneurship)
- NEP-INO-2012-03-28 (Innovation)
- NEP-KNM-2012-03-28 (Knowledge Management & Knowledge Economy)
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