To Boost R&D, Close Pay Gaps

Companies that want to boldly go into new knowledge domains should start by looking inward at compensation design. A new study, featured in Research Policy journal and co-authored by management professor Waverly W. Ding at the University of Maryland’s Robert H. Smith School of Business, shows that large pay gaps among research and development professionals at the same job level within an organization can stifle exploratory innovation — the kind that leads to U.S. patent filings.

Unlike exploitative innovation, which involves incremental improvements and refinements, exploratory innovation requires close collaboration among boundary spanners from multiple backgrounds. “Breaking through into new domains where the firm has not previously traveled requires knowledge heterogeneity,” Ding says. “It also requires appetite for risk because of the uncertainties involved.”

Paying R&D professionals unequal amounts for similar work can sap team spirit and trigger complaints about inequity, especially if the gaps appear arbitrary. The effects are less pronounced at companies with older R&D employees on average or at firms with greater age variance.

Unlike past innovation studies, which have explored the effects of executive compensation design, Ding and her co-authors focus on pay gaps among rank-and-file R&D personnel at 81 high technology firms in the United States over a six-year period.

“Setting research direction is no longer the sole responsibility of top executives,” Ding says. “Beginning in the late 1980s, industrial research has become more decentralized.”

At the same time, U.S. firms have become less hierarchical and more flexible in structure and management. Companies such as 3M and Google even allow engineers to devote a fraction of their work time to projects of their own choosing, even if the projects are not directly related to any immediate corporate goals.

“These trends suggest an expanding role in knowledge creation played by R&D employees below the senior ranks,” Ding says.

Read more: “Exploration versus exploitation in technology firms: The role of compensation structure for R&D workforce” is featured in Research Policy.