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

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 understudied. This paper advances understanding of the relationship between pay gaps and firm innovation by examining tournament and social comparison effects. Using Chinese A-share listed companies from 2009–2019, the study finds a potential inverted U-shaped impact of all pay gaps on innovation: internal pay gap and management pay gap correspond to the left half of an inverted U, while the external pay gap exhibits a complete inverted U. Using fsQCA, the study shows small firms can stimulate innovation via management pay incentives, internal tournaments, or employee tournaments; large firms can use management equity incentives, low-pay strategies for growth, or combined pay and equity incentives. The interplay between pay gaps and innovation is contingent on industry and firm characteristics, underscoring the need to design pay structures aligned with strategic goals and firm attributes.

Song Wang, Zhiyuan Lin