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Abstract Corporate innovation constitutes a complex team endeavor characterized by high investments, exploratory efforts and multiple stages, which necessitates collaborative efforts and collective participation of the members in innovation teams. Among them, senior executives and core employees are the two most critical groups of human resources. How to design scientific team compensation to stimulate innovation enthusiasm of both senior executives and core employees remains a pivotal topic within the realm of corporate governance. Equity incentive, a typical team-based compensation aimed at fostering organizational innovation, encompasses both senior executives and core employees as beneficiaries. The incentive disparity between the two groups of recipients inevitably, affects their psychological perception and behavioral decisions. Moreover, equity incentive plan is a document that the China Securities Regulatory Commission mandates to be publicly disclosed. Listed companies are obligated to publicly disclose the list of incentive recipients and the quantity of granted equity. This offers employees a detailed and convenient information channel for compensation comparison. However, existing research has predominantly examined the isolated impact of equity incentive for senior executives or core employees on corporate innovation from the perspective of absolute incentive levels, which has overlooked the effect of the incentive disparity between the two groups of incentive recipients. Based on the data of Chinese A-share listed companies from 2006 to 2020, this study examines the impact and mechanisms of equity incentive disparity (EID) between senior executives and core employees on corporate innovation output (CIO). The findings suggest that EID significantly hampers CIO, and this inhibitory effect exhibits a trend of continuous strengthening. Mechanism tests reveal that reducing employee effort, hindering team collaboration, and disrupting team stability are the underlying channels through which EID impedes CIO. Supplementary analysis demonstrates that the innovation inhibitory effect of EID is more pronounced in samples with a low likelihood of internal promotion, high accessibility to compensation information, and a high sense of employee fairness perception. Further studies based on innovation output quality indicate that EID worsens patent structures and reduces patent citations. Diving deeper into the quality of innovation output suggests that EID diminishes the application and market value of patents.This paper contributes to the literature and practice in the following three dimensions. First, the study reveals the inhibitory effect of EID on CIO and further unveils the internal mechanisms from the perspectives of employee effort, team collaboration, and employee stability. This exploration widens the understanding of disparities in internal compensation through the lens of equity-based incentives. Second, the study illuminates that EID is also a crucial factor influencing CIO, which extends the scope of research on equity incentive contracts from the viewpoint of internal relative incentive disparities. Third, the study’s findings have important implications. For companies, this finding provides valuable insights to optimize equity incentive contract designs and stimulate innovative capacities. For policy makers, the finding offers important reference to improve the regulatory system of equity incentive plans and optimize the distribution of equity compensation within enterprises.
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Published: 31 October 2023
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