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

Victor Cui; Waverly W. Ding; Yoshio Yanadori

doi:10.1016/j.respol.2019.03.008

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

Victor Cui, Waverly W. Ding^*, Yoshio Yanadori

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

15 Citations (Scopus)

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.

Original language	English
Pages (from-to)	1534-1549
Number of pages	16
Journal	Research Policy
Volume	48
Issue number	6
DOIs	https://doi.org/10.1016/j.respol.2019.03.008
Publication status	Published - 2019 Jul
Externally published	Yes

Keywords

Compensation
Exploration and exploitation
Innovation
Motivation
Pay dispersion
R&D employee
Tournament incentive

ASJC Scopus subject areas

Strategy and Management
Management Science and Operations Research
Management of Technology and Innovation

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10.1016/j.respol.2019.03.008

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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{\textquoteright} 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{\textquoteright} age variance is low. In firms where R&D employees{\textquoteright} age variance is high, the negative relationship between horizontal pay dispersion and exploration is muted.",

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note = "Funding Information: This work was supported by the Social Sciences and Humanities Research Council (SSHRC) of Canada (Grant number: 435-2017-1301 , 2017-2022 ). Funding Information: This work was supported by the Social Sciences and Humanities Research Council (SSHRC) of Canada (Grant number: 435-2017-1301, 2017-2022). We are indebted to Beth Florin and the late Joseph Rich for making available the data for this study. We are grateful for the feedback from participants of Wharton People and Organization Conference and of the Department of Innovation and Organizational Economics Seminar at the Copenhagen Business School. Publisher Copyright: {\textcopyright} 2019 Elsevier B.V.",

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

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Keywords

ASJC Scopus subject areas

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