The Impact of Executive Compensation Performance Sensitivity on Corporate Innovation in an Uncertain Environment

Abstract

Enhancing corporate innovation capabilities in complex and uncertain environments is a focal point of societal concern. This study examines the impact of executive compensation performance sensitivity on corporate innovation against the backdrop of environmental uncertainty, using a sample of listed companies on the Shanghai and Shenzhen A-shares market from 2015 to 2020. Empirical results indicate that executive compensation performance sensitivity significantly inhibits corporate innovation; however, this inhibitory effect varies with the characteristics of the environment and the industry in which the company operates. As environmental uncertainty increases, this inhibitory effect becomes insignificant. High-tech enterprises, due to their strong motivation for innovation, can offset the inhibitory effect of executive compensation performance sensitivity on corporate innovation. Nevertheless, in highly uncertain environments, where resource constraints and risks are heightened, the inhibitory effect of executive compensation performance sensitivity on corporate innovation in high-tech enterprises becomes significant. The conclusions of this study contribute to the understanding of the motivational effects of executive compensation contracts in uncertain environments, provide a reference for evaluating the effectiveness of performance-based compensation from the perspective of corporate innovation, and offer insights for companies in designing and refining executive compensation incentive plans according to the times and industry characteristics.