Executive Compensation and Firm Innovation: the Role of Pay Components and Pay Dispersion

Compensation packages are widely used to motivate top executives to generate and sustain a constant flow of innovations. Dispersion in pay structures among a firm’s executives, however, triggers two antithetic effects: social comparison and individual motivation. Assessing these opposing forces, we investigate the effect of executive pay dispersion on corporate innovation activities. We find that executive pay dispersion acts as a double-edged sword for corporate innovation: on the one hand, dispersion in variable pay significantly increases innovation; on the other hand, dispersion in fixed pay depresses innovation. Studying contextual variations, we find that executive pay dispersion matters primarily in innovative industries. Keywords: executive pay; pay dispersion; motivation; innovation; patents