Exploration versus exploitation in technology firms: the role of compensation structure for R&D workforce
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Date
2019
Authors
Cui, V.
Ding, W.W.
Yanadori, Y.
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Research Policy, 2019; 48(6):1534-1549
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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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Copyright 2019 Elsevier B.V.
Access Condition Notes: Accepted manuscript available after 1 April 2022