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
Date Written: March 9, 2019
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: Suggested Citation