Exploration versus exploitation in technology firms: The role of compensation structure for R&D workforce

Victor Cui, Waverly W. Ding and Yoshio Yanadori

Research Policy, 2019, vol. 48, issue 6, 1534-1549

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.

Keywords: R&D employee; Motivation; Compensation; Pay dispersion; Tournament incentive; Innovation; Exploration and exploitation (search for similar items in EconPapers)
JEL-codes: J31 O31 O32 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:respol:v:48:y:2019:i:6:p:1534-1549

DOI: 10.1016/j.respol.2019.03.008

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