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

Victor Cui, Waverly W. Ding, Yoshio Yanadori

Research output: Contribution to journalArticle

3 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 languageEnglish
Pages (from-to)1534-1549
Number of pages16
JournalResearch Policy
Volume48
Issue number6
DOIs
Publication statusPublished - 2019 Jul
Externally publishedYes

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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