Executive Pay Dispersion and Firm Innovation: Evidence from an Emerging Economy

This study set out to examine how executive pay dispersion influences firm innovation intensity among BSE 500 listed Indian firms over the period 2013–14 to 2023–24. By focusing on the distribution of pay within the top management team rather than only the level of executive compensation, the study provides new insight into how internal incentive structures shape long-term strategic decisions. Using a panel data framework with firm fixed effects and year controls, the findings reveal a robust and negative relationship between executive pay dispersion and firm innovation intensity. This suggests that greater inequality between the CEO and other top executives weakens collaboration and reduces support for risky, long-term R&D investments. The results also show that innovation is influenced by a broader set of financial, organizational, and governance factors. Higher leverage is associated with lower innovation, indicating that financial pressure and debt obligations constrain firms’ ability to invest in uncertain projects. Firm age is negatively related to innovation, reflecting the role of organizational inertia and structural rigidity in limiting adaptability. CEO tenure also shows a negative effect, suggesting that long-serving leaders may become entrenched and less inclined to pursue disruptive innovation. In contrast, board size is positively associated with innovation intensity, highlighting the supportive role of diverse and resourceful boards in encouraging long-term strategic investments. Firm size and CEO age, however, do not exhibit consistent independent effects once other factors are considered. Overall, the findings reinforce the view that innovation is not determined solely by technological opportunities or market conditions but is deeply shaped by internal governance arrangements. Executive pay dispersion emerges as a key internal governance factor that can either support or hinder innovation depending on how compensation is structured. By linking compensation inequality within the executive team to firms’ innovation investment, this study contributes to a more nuanced understanding of the behavioral and governance foundations of corporate innovation, particularly in an emerging market context.

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