Salary Inversion and Firm Innovation—Evidence from Chinese State-owned Enterprise Groups

Abstract

Abstract: Innovation is a crucial strategic activity for firms, and has a significant impact on firms' building long-term competitive advantages. However, previous practice and studies have demonstrated that there are substantial variations in firms' innovation behaviors caused by different interest mechanisms. The executives' decision-making behaviors can be directly impacted by the salary contracts, which is a key incentive mechanism. The occurrence of executive “salary inversion” between state-owned enterprise groups and their subordinate firms provides an opportunity for this study to identify differentiated innovation behaviors of firms. This study investigates how salary inversion affects a firm's innovation investment using a sample of A-share listed firms affiliated to state-owned enterprise groups from 2015 to 2019. As this study reveals that salary inversion leads to an increase in innovation investment, and the higher degree of salary inversion in a firm, the higher investment the firm tends to make in innovation. Further analysis shows that salary inversion motivates firms to choose tactic innovation, which mainly increases the quantity of innovation output, but does not significantly improve the quality of innovation. This paper provides an analysis of firm innovation behaviors within the framework of state-owned enterprise's salary system reform, an examination of firm innovation motivation from the pay defense perspective, and some new insights into the policy ramifications of state-owned enterprise salary system reform.

Key words: salary inversion, state-owned enterprise groups, firm innovation

Lu Chuang, Jiao Yan, Zhang Wenting. Salary Inversion and Firm Innovation—Evidence from Chinese State-owned Enterprise Groups[J]. Management Review, 2026, 38(1): 78-89.

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