| Abstract: |
Given the importance of exploration in a firm’s overall innovation program,
scholars have sought to understand organizational factors that give rise to
exploration-oriented innovations. We propose theory and empirical evidence
that relates firms’ 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. |