Abstract
Building on social comparison theory, this study investigates the impact of salary co-movement between top executives and ordinary employees on corporate innovation. Using a sample of A-share listed companies in China from 2011 to 2017, we find that lockstep salary movement between top executives and ordinary employees positively influences corporate innovation. Furthermore, such effect is more pronounced for non-state-owned enterprises (non-SOEs), high-tech firms, and firms facing a highly competitive environment. Finally, this paper identifies heightened efforts and low turnover as two major mechanisms through which salary co-movement affects innovation. The takeaway message is that the optimal compensation policy for promoting innovation is to motivate both top executives and ordinary employees. Overly compensating one at the expense of the other will do just the opposite.
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