Research On The Impact Of Compensation Fairness On Corporate Innovation In The Chinese Context

In recent years,China has steadily promoted the "innovation-driven development strategy",and enterprises,as innovation subjects at the micro level,are the foundation of macro-innovation subjects in industries,regions and countries.How to stimulate enterprises to improve the level and quality of innovation is not only an inherent requirement for the transformation and high-quality development of enterprises,but also a realistic need for the country to improve its technological competitiveness.The process of enterprise innovation is the integration of internal and external resources,and corporate governance is the deployment of resources in the mutual restraint of the interests of all parties.Compensation incentive for innovative talents has an important impact on the innovation performance of enterprises.However,existing research has not reached a consensus conclusion on how compensation management affects corporate innovation,and there are two opposing explanations for the economic consequences of the pay gap: tournament theory and equity theory.These studies may ignore the link between the causes of pay gaps and their economic consequences.If pay gaps are due to economic factors such as job performance and labour market characteristics,they are seen as a fair reflection of individual talent,skills and effort,and thus have a tournament incentive effect on employees.Conversely,pay gaps caused by non-economic factors can easily trigger a psychological perception of unfairness,leading to negative emotions and behaviours.In the Chinese context,where the Confucian concept of fairness is deeply rooted and the socialist market economy is highly concerned with distributive justice,it is important to study the innovative incentive role of corporate compensation from an equity perspective.This study measures the fairness of compensation in terms of unreasonable pay gaps: external compensation fairness for executives is measured by unreasonable pay gaps between executives and executives of local enterprises,external compensation fairness for employees is measured by unreasonable pay gaps between employees and employees of local enterprises,and internal compensation fairness is measured by unreasonable pay gaps between executives and employees within enterprises,with the larger the gap,the lower the fairness.In order to distinguish the unreasonable part of the pay gap,firstly,the economic factors affecting the compensation of executives or employees are used to construct an explanatory model for executive and employee pay respectively,and the fitted value of the model is used as the reasonable compensation to compare and measure the unreasonable pay gap.In addition,internal compensation process fairness is measured by the difference in pay stickiness between executives and employees.After defining this set of key compensation fairness variables,the hypotheses related to external compensation fairness and corporate innovation and internal compensation fairness and corporate innovation proposed in this study are empirically analysed and tested using a sample of A-share listed companies from 2010-2019.Then we discuss the endogeneity of compensation fairness and corporate innovation,do a multi-perspective robustness test,and further test the mediating effect of innovation input and innovation efficiency,as well as the test of corporate heterogeneity due to the nature of ownership,equity concentration and executive reputation.For the role of contextual factors with Chinese characteristics,the marketisation process,high-tech enterprise recognition,political affiliation and Confucian cultural influence are selected as moderating variables to test their moderating effects in the relationship between compensation fairness and innovation.The paper ultimately concludes the following findings:(1)Corporate external compensation fairness is generally positively related to corporate innovation(i.e.an unreasonable external pay gap discourages corporate innovation),executive external compensation fairness affects innovation performance through corporate innovation inputs,and employee external compensation fairness affects innovation performance through corporate innovation efficiency.In contrast,a reasonable external pay gap for executives and employees has an incentive effect on innovation.The above relationship is more pronounced in private enterprises,enterprises with lower equity concentration and higher reputation of executives.(2)Fairness in internal pay distribution is positively related to innovation(i.e.unreasonable internal pay gap hinders innovation)and affects innovation performance mainly through the efficiency of innovation transformation,and this effect is more significant in state-owned enterprises,enterprises with lower equity concentration and higher reputation of executives.In contrast,a reasonable pay gap within a firm has an incentive to innovate.Fairness in the intra-firm pay process is negatively related to firm innovation(i.e.the executive-employee pay stickiness gap can promote firm innovation)and affects innovation performance mainly through innovation inputs,an effect that is more pronounced in SOEs or firms with higher equity concentration.(3)Contextual factors with Chinese characteristics play a moderating role in the impact of compensation fairness on innovation.The marketization process and the recognition of high-tech enterprises can promote innovation but weaken the impact of compensation fairness on corporate innovation;political affiliation amplifies the impact of compensation fairness on corporate innovation;Confucian cultural influence may have a two-way moderating effect and,in general,weaken the impact of compensation fairness on corporate innovation.In general,both tournament theory and equity theory are reasonable in explaining the economic consequences of the pay gap,but the key is to distinguish between the rational and irrational parts of the pay gap.In the Chinese context,it is more appropriate to adopt the equity theory perspective to analyse the effectiveness of corporate pay contracts and to focus more on the impact of compensation fairness on corporate innovation.This study finds that fairness in the internal pay process and fairness in the external pay of executives mainly affects executives' motivation to innovate,which manifests itself in the amount of resources invested in innovation activities during the innovation decision-making stage.Fairness in the internal pay process leads to a decrease in innovation investment and is not conducive to innovation,while fairness in the external pay of executives leads to an increase in innovation investment and is conducive to innovation;fairness in the internal pay distribution of enterprises and fairness in the external pay of employees mainly The fairness of internal pay distribution and external pay of employees mainly affects employees' motivation to innovate,which is manifested in the increase of the efficiency of enterprises' conversion of innovation resources during the innovation implementation stage and is conducive to innovation.In the context of China's innovation-driven development strategy and the concept of common prosperity,this paper studies the issue of improving the innovation level of enterprises from the perspective of compensation fairness,in an attempt to make an innovative exploration in the field of enterprise innovation management research.The research results of this paper provide theoretical support and concrete suggestions for Chinese enterprises to improve the design of remuneration contracts,improve corporate governance mechanisms and enhance their technological innovation strength,as well as policy recommendations for policy makers to promote the national innovation-driven development strategy,which has certain theoretical and practical significance.On the basis of existing research,the possible marginal contributions of this paper are as follows:(1)This study analyses and adds to the concept,connotation and economic consequences of compensation fairness,enriching the theoretical system of corporate pay management to a certain extent.By implementing compensation fairness as a lower unreasonable pay gap,it unifies the seemingly contradictory explanations of the economic consequences of the pay gap between tournament theory and equity theory.(2)Focusing on the Chinese context,this study examines the relationship between pay and innovation,focusing on the importance of the cultural and political climate for fairness in the Chinese context,and specifically discussing the moderating role of contextual factors with Chinese characteristics,adding to the construction of a theoretical system of corporate management with Chinese characteristics.(3)This study explores the innovation-motivating role of compensation fairness,discussing the impact of external compensation fairness for executives,external compensation fairness for employees,internal pay distribution equity,and internal pay process equity on innovation and their mechanisms respectively,providing valuable ideas for further research on the topic of corporate governance and innovation enhancement in the future.