How the executive pay gap affects corporate innovation

Abstract

ABSTRACT There is already a wealth of literature on how the design of salary for technicians affects corporate innovation, but the influential mechanisms of executive incentives on corporate innovation have not received sufficient attention. As a source of motivation for executives to promote innovation, the design of pay gap plays an important role in improving firm’s innovation performance. In this research, we attempt to examine the impact of the executive team’s internal pay gap on corporate innovation using data from Chinese A-share listed companies from 2016 to 2021. The results are as follows. Firstly, pay gap among executives can significantly enhance a firm’s innovation performance. Secondly, the executive pay gap promotes innovation through the stability of executive team members. Thirdly, executive compensation stickiness moderates pay gap and firm’s innovation positively. This paper reveals the mechanism by which the executive pay gap affects corporate innovation and suggests that companies should formulate effective compensation incentive mechanisms to stimulate executives’ enthusiasm for innovative projects, and strengthen executive support and promotion of corporate innovation.