The Impact Of Internal And External Pay Gap Of Firms On Innovation Performance

Innovation is a major tool for enterprises to strengthen their core competitiveness and seek long-term development,and it is also a source of power for China to implement the new development concept and achieve high-quality development.Innovation is necessary to promote high-quality development,to improve people’s living standards,and to start a new journey towards building a modern socialist country.Innovation is a driving engine for long-term development and progress,and has a significant impact on both the country and society,while innovation is a high-investment,high-risk and long-return corporate strategy.Executives and employees are the backbone of corporate innovation,and it is important to focus on how to realize the important role of executives and employees in improving innovation performance through appropriate incentive mechanisms.The internal consistency and external fairness of pay have a significant impact on the behavior of the company’s management and the behavioral decisions of executives and employees,and are important tools for motivating the creativity of the senior management team and general staff.Internal consistency and external fairness are two criteria that reflect the effectiveness of a company’s remuneration system,and this paper uses the internal and external pay gap to measure and characterize the internal consistency and external fairness of remuneration.Considering the key time point of 2015 when China started to implement the "Wage Restrictions Order" for senior executives of state-owned enterprises,a two-way fixed-effects model is constructed for the sample of A-share listed companies in Shanghai and Shenzhen from 2015 to 2020,and the baseline regression analysis of internal pay gap and external pay gap on the innovation performance of enterprises is conducted respectively,and robustness tests were conducted by regression of the patent applications as a proxy for innovation performance based on replacing sensitive variables,adding the legacy variable "R&D investment" as a control variable,lagging core explanatory and control variables.Finally,in an extended study,a heterogeneity test on the nature of ownership of the enterprise is conducted,and the relationship between pay gap and innovation efficiency is analyzed by introducing the explanatory variable "firm innovation efficiency",and also a trend analysis of the impact of pay gap on firm innovation performance is conducted.The findings show that:(1)the internal pay gap of the executive team,the internal executive-employee pay gap,the external pay gap of the executive team,and the external pay gap of the employees can independently and positively contribute to corporate innovation performance;(2)after incorporating the internal pay gap of the executive team and the internal executive-employee pay gap into the overall internal pay gap model,the internal pay gap of the executive team still has a positive effect on corporate innovation performance,and the internal executive-employee pay gap shows a negative inhibitory effect on corporate innovation performance.Further tests find that the internal pay gap of the executive team plays a masking effect in the effect of the internal executive-employee pay gap on firm innovation performance;after incorporating the external pay gap for the executive team and the external pay gap for employees in the overall external pay gap model,the positive contribution of both to the firm’s innovation performance remains significant.(3)The results of the heterogeneity test show that the effects of the internal pay gap of the executive team,the internal pay gap of the executive-employee team and the external pay gap of the employee team on the innovation performance of enterprises differ between state-owned enterprises and non-state-owned enterprises,and the promotion effect of the internal pay gap of the executive team on the innovation performance of enterprises and the suppression effect of the internal pay gap of the executive-employee team on the innovation performance of enterprises in SOEs are stronger than those in non-SOEs.The external pay gap of employees in SOEs has a significant positive contribution effect on firms’ innovation performance,while no significant effect appears in non-SOEs;the external pay gap of the executive team does not show variability under different nature of enterprise ownership.(4)The internal executive-employee pay gap has a certain degree of inhibiting effect on corporate innovation efficiency,while the external employee pay gap will improve corporate innovation efficiency to a certain extent;the internal executive team pay gap and the external executive team pay gap have no significant effect on corporate innovation efficiency.(5)From the trend of the influence of pay gap on corporate innovation performance,the driving effect of external competitiveness of corporate pay on corporate innovation performance gradually diminishes,while there is no significant trend of the impact of internal pay gap.This paper attempts to break through the existing research perspective and focus on the pay system in human resource management,characterize the internal consistency and external fairness of the pay system through pay gap measurement,and consider the holistic model of internal and external pay gap,in order to explore the empirical support and policy recommendations for pay management that can effectively promote the improvement of innovation performance of Chinese enterprises.