CEO-employee Pay Gap And Corporations' Innovation Efficiency

Innovation is a vital source of a country's long-term economic growth(Solow,1957).Acting as the main force of technology innovation,enterprises' innovation activity is the key to improving the national competition,making the influence factors of innovation activity much important.Compared with the normal production activities,the process of innovation relates to previous huge capital investment and uncertain earnings in the future,being an activity full of spillover effects and risk of imitation by other opponents.With the increase of innovation inputs every year,the efficiency of innovation in China is still at a low level(Yu,2011),so it is necessary for China to pay attention to both the innovation input and efficiency during the transition into an innovative country,especially given the present condition that China is short of innovation input and the efficiency problem prominent.Therefore,how to design a reasonable compensation contract to promote the efficiency of enterprise technology innovation has become a key issue.On the one hand,the classical principal-agent problem holds that moral risk exists among managers,leading their self-interest behaviors which are not conducive to the long-term development of enterprises.On the other hand,the sources of innovation include not only numerous capital but the decision-making ability of executives,specialties of technical personnel,and the cooperation of the general staff.Moreover,when staff within an organization focus on their own absolute income,they tend to compare with others so as to value the rationality of their earnings(Festinger,1954).Based on the above analysis,starting from the pay gap between executives and employees,we empirically test how to effectively stimulate technological innovation and efficiency.Using 2005-2014 China's A-share listed companies as research samples,we exploit the relationship between CEO-Employee pay gap and the enterprise technology innovation.The main results are as follows:(1)CEO-Employee pay gap does harm to the efficiency of innovation activities,and this negative effect is more serious among state-owned enterprises and enterprises with powerful executives.The CEO-Employee pay gap caused by aggressive strategy has a positive effect on innovation efficiency.(2)Classifying different type of innovation,we find that CEO-Employee pay gap only promote the other types of patent(strategic innovation),but has no effects on the invention patent(substantial innovation).(3)There is a significant negative correlation between CEO-Employee pay gap and employee efforts,which is positively correlated with employee turnover rate,indicating that CEO-Employee pay gap has no positive effects on employees.