Pay structure and firm technological innovation: comparative research based on three pay gaps

Abstract

While previous research has extensively explored the correlation between pay gaps and firm innovation, the comprehensive investigation of various pay gaps within a unified framework remains an understudied domain. We advance the understanding of the intricate relationship between pay gaps and firm innovation by examining the tournament effect and social comparison effect. Through empirical analysis spanning the period from 2009 to 2019 of Chinese listed companies, our findings reveal a potential inverted U-shaped curve in the impact of all pay gaps on firm innovation. Specifically, the effects of internal pay gap and management pay gap exhibit the left half of an inverted U-shaped curve, while the external pay gap demonstrates a complete inverted U shape. Additionally, utilizing fsQCA, we unveil that small firms can stimulate innovation through management pay incentives, internal tournaments, or employee tournaments. Conversely, large firms can pursue diverse paths, including management equity incentives, strategic emphasis on low pay for firm growth, or a harmonious combination of management pay and equity incentives. The intricate interplay between pay gaps and firm innovation is contingent upon industry and firm characteristics. Consequently, our study underscores the importance of meticulously designing pay structures that align with strategic goals and unique attributes.