How to Motivate Core Technical Employees and Middle-Level Managers: Evidence from Equity Incentive, Innovation, and Firm Specificity

Abstract

This paper examines to what extent the equity incentives awarded to a specific group of nonexecutive employees (core technical employees and middle-level managers) are related to subsequent corporate innovation and firm specificity. We exploit a unique dataset to directly capture core staff equity incentives and their associated features. We document the following findings: (1) using an instrumental variable approach, we document a positive causal relation between core staff stock option value per employee and innovation; (2) core staff restricted stock value per employee leads to better firm specificity and a longer contribution horizon; (3) an indirect measure of nonexecutive equity incentives adopted in the prior literature underestimates their contribution to innovation; and (4) an optimal core staff equity incentive plan should allow for enough pressure at the beginning as well as long-lasting monetary incentives in the future.

Keywords: nonexecutive employees, equity incentive, corporate innovation

JEL Classification: G30, J41, M52, O31