TIME:10:00-11:30, April 02, 2011

ROOM: 216,New Building

SPEAKER: Waverly Ding, Assistant Professor, Haas School of Business,University of California

TITLE: Compensation Structure and the Creation of Exploratory Knowledge in Technology Firms

Abstract:

Given the importance of exploration in a firm' '&' 'rsquo;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' '&' 'rsquo; use of financial incentives to their exploratory innovation performance. We expect that a larger proportion of long-term incentives in R' '&' 'amp;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' '&' 'amp;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 long-term 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.