2006): “Compensation strategy: does business strategy influence compensation in high-technology firms

Drawing on the strategic employee group concept, this study empirically examines whether a firm’s innovation strategy influences compensation systems for strategic employee groups in the high-technology industry. We focus on compensation packages for R&D employees who play a critical role in successful implementations of innovation strategy. Using compensation data for middle-level managers and professional employees from 237 firms in the high-technology industry, we found that a firm’s strategic intention to pursue innovation has a significant influence on the relative pay level, compensation time horizon, and stock option vesting period lengths of this strategic employee group. Copyright 2006 John Wiley & Sons, Ltd. When properly designed, compensation systems promote desirable employee behaviors, which are instrumental to the successful implementa-tion of business strategies (Gerhart and Rynes, 2003; Milkovich and Newman, 2005). As a result, good fit, or alignment, between an orga-nization’s business strategy and its compensation systems should lead to improved organizational effectiveness (Gerhart, 2000; Gomez-Mejia and Balkin, 1992a). Based on this premise and its implication for organizational effectiveness, both researchers and practitioners expect firms pur-suing different business strategies to have dif-ferent compensation systems with business strat-egy representing a key influence on compensation design. This study provides empirical evidence on the influence of business strategy on organizationa