Compensation Structure and the Creation of Exploratory Knowledge in Technology Firms 1

Given the importance of exploration in a firmâ[euro](TM)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[euro](TM) use of financial incentives to the...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Cui, Victor, Ding, Waverly W, Yanadori, Yoshio
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2011
Subjects
Compensation
Incentive plans
Innovations
Monetary incentives
Technological change
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Summary:Given the importance of exploration in a firmâ[euro](TM)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[euro](TM) 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.