Exploration versus Exploitation in Technology Firms: The Role of Compensation Structure for R&D Workforce

48 Pages Posted: 18 Oct 2016 Last revised: 12 Mar 2019

See all articles by Victor Cui

Victor Cui

University of Manitoba - Asper School of Business; Sauder School of Business, University of British Columbia

Waverly W. Ding

University of Maryland - R.H. Smith School of Business

Yoshio Yanadori

University of South Australia

Date Written: March 9, 2019

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 pay levels and vertical tournament incentives between pay 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, innovation, exploration and exploitation

JEL Classification: J310, O310, O320

Suggested Citation

Cui, Victor and Ding, Waverly W. and Yanadori, Yoshio, Exploration versus Exploitation in Technology Firms: The Role of Compensation Structure for R&D Workforce (March 9, 2019). Available at SSRN: https://ssrn.com/abstract=2852953 or http://dx.doi.org/10.2139/ssrn.2852953

Victor Cui

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada

Sauder School of Business, University of British Columbia ( email )

2053 Main Mall
Vancouver, British Columbia BC V6T 1Z2
Canada

Waverly W. Ding (Contact Author)

University of Maryland - R.H. Smith School of Business ( email )

United States
301-405-1381 (Phone)

HOME PAGE: http://www.rhsmith.umd.edu/management/faculty/ding.aspx

Yoshio Yanadori

University of South Australia ( email )

37-44 North Terrace, City West Campus
Adelaide, South Australia 5001
Australia

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