Untangling innovation: an examination of compensation, corporate social responsibility, and corporate financial performance

Abstract

Purpose This study aims to examine how highly innovative firms behave differently from their peers to become profitable. The authors investigate this through two distinct groups, one group of firms that have appeared on the Forbes 100 most innovative firms for 5 out of the past 10 years and a carefully curated control group. Design/methodology/approach Using a matched sample of 190 distinct firms, all with 10 years of historical data, the authors conduct a series of regressions and two mediated models. This method enables the examination of several possible differentiators for highly innovative firms, namely, CEO Pay, CEO Pay Ratio, Median Employee Pay and Corporate Social Responsibility (CSR). Findings In all, the authors conducted five separate hypothesis tests, all with statistical significance. Of note, the authors find innovative companies do pay employees more, engage in more CSR acts and are more profitable than peer companies. In a mediated regression model, the authors also find that the median employee pay fully mediates the relationship between firm innovation and corporate financial performance. Research limitations/implications The study first shows that these highly innovative firms do not reach a position to rely merely on their innovation reputation to be profitable or attract eager employees. The authors find no relationship between years on the Forbes 100 list and profitability, median pay or total CSR in the data. Practical implications This research uses commonly available data to explore how innovative firms behave. Rather than being single-mindedly focused on innovation, results indicate that innovative elite firms are more generous (in employee pay) and concerned about non-profit factors (CSR) than their peers. Innovative firms are then able to do all this and remain profitable. An additional implication of this research is that managers should prioritize CSR. CSR is not just a tool for less innovative companies to distinguish themselves or firms with low reputations to rehabilitate themselves. Social implications As a society, we are living through unprecedented times concerning how we treat one another in the world. Often, the argument is made that firms should specialize, optimize and be strategically focused. However, highly innovative firms (often regarded as focused, specialized and optimized) in the sample show that paying people more and carrying out CSR is highly compatible with their success. Originality/value To the best of the researchers’ collective knowledge, this study is the only one of its kind to create and use such a robust data set, obtaining data from four different sources, namely, 10 years of Forbes top 100 innovative companies, SEC filing of the DEF 14 A for each company for two years, the Kinder, Lyndenberg and Domini database for 10 years and Compustat data for 10 years.