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Compensation Structure and the Creation of Exploratory Knowledge in Technology Firms

  • Cui, Victor
  • Ding, Waverly W.
  • Yanadori, Yoshio
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    Given the importance of exploration in a firm’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 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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    File URL: http://www.escholarship.org/uc/item/4f7671kn.pdf;origin=repeccitec
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    Paper provided by Institute of Industrial Relations, UC Berkeley in its series Institute for Research on Labor and Employment, Working Paper Series with number qt4f7671kn.

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    Date of creation: 01 Feb 2011
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    Handle: RePEc:cdl:indrel:qt4f7671kn
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    Web page: http://www.escholarship.org/repec/iir_iirwps/

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    1. Seth Carnahan & Rajshree Agarwal & Benjamin Campbell & April Franco, 2010. "The Effect of Firm Compensation Structures on Employee Mobility and Employee Entrepreneurship of Extreme Performers," Working Papers 10-06, Center for Economic Studies, U.S. Census Bureau.
    2. Dechow, Patricia M. & Sloan, Richard G., 1991. "Executive incentives and the horizon problem : An empirical investigation," Journal of Accounting and Economics, Elsevier, vol. 14(1), pages 51-89, March.
    3. Auh, Seigyoung & Menguc, Bulent, 2005. "Balancing exploration and exploitation: The moderating role of competitive intensity," Journal of Business Research, Elsevier, vol. 58(12), pages 1652-1661, December.
    4. Tehranaian, Hassan & Travlos, Nickolaos G & Waegelein, James F, 1987. " The Effect of Long-term Performance Plans on Corporate Sell-Off-Induced Abnormal Returns," Journal of Finance, American Finance Association, vol. 42(4), pages 933-42, September.
    5. Holthausen, Robert W. & Larcker, David F. & Sloan, Richard G., 1995. "Business unit innovation and the structure of executive compensation," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 279-313, April.
    6. Fredrik Andersson & Matthew Freedman & John Haltiwanger & Julia Lane & Kathryn Shaw, 2009. "Reaching for the Stars: Who Pays for Talent in Innovative Industries?," Economic Journal, Royal Economic Society, vol. 119(538), pages F308-F332, 06.
    7. Jansen, J.J.P. & van den Bosch, F.A.J. & Volberda, H.W., 2006. "Exploratory Innovation, Exploitative Innovation, and Performance: Effects of Organizational Antecedents and Environmental Moderators," ERIM Report Series Research in Management ERS-2006-038-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    8. Josh Lerner & Julie Wulf, 2007. "Innovation and Incentives: Evidence from Corporate R&D," The Review of Economics and Statistics, MIT Press, vol. 89(4), pages 634-644, November.
    9. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-64, October.
    10. Main, Brian G M & O'Reilly, Charles A, III & Wade, James, 1993. "Top Executive Pay: Tournament or Teamwork?," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 606-28, October.
    11. Christopher C. Liu & Toby E. Stuart, 2010. "Boundary spanning in a for-profit research lab: An exploration of the interface between commerce and academe," Harvard Business School Working Papers 11-012, Harvard Business School.
    12. Mark C. Anderson & Rajiv D. Banker & Sury Ravindran, 2000. "Executive Compensation in the Information Technology Industry," Management Science, INFORMS, vol. 46(4), pages 530-547, April.
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