Vertical Compensation Gap and Corporate Innovation

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School of Business | Bachelor's thesis
Degree programme
Tieto- ja palvelujohtaminen
This bachelor’s thesis explores the relationship between the vertical compensation gap and corporate innovation. The vertical compensation gap, which is defined as the differences in compensation between hierarchical levels in an organization, has been identified as a crucial factor influencing the corporate innovation outputs of a company. By combining recent literature, this thesis reviews two previously identified frameworks: the tournament theory, which advocates for wider compensation gaps to enhance motivation and innovation through competition, and the social comparison theory, which posits that larger pay disparities can demotivate employees through perceived unfairness and inequality. By conducting a literature review of studies from 2018 to 2023, this thesis identifies conflicting evidence on the impact of the vertical compensation gap on corporate innovation. Some studies suggest in line with the tournament theory that larger compensation gaps can stimulate innovation by promoting a competitive, reward-based culture. Other studies argue that large disparities may lead to reduced collaboration and employee morale, resulting in less innovation. This thesis identifies and evaluates the positive and negative effects of the vertical compensation gap on corporate innovation. The results highlight the complexity and intricacy of the relationship and provides insights on what organizations must consider when designing compensation structures to foster an innovative environment. This thesis not only contributes to the academic discussion on compensation strategies but also offers recommendations for business leaders aiming to maximize innovation through creating a competitive yet equitable workplace.
Thesis advisor
Kim, Seongtae
vertical compensation gap, corporate innovation, compensation structures, tournament theory, social comparison theory
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