Motivated by diverse anecdotal evidences from the Chinese markets and focusing on a technologically following firm, this paper analyzes how the managerial compensation structure affects the managerial innovative incentives, the vertical differential output competition, and the evolutions of the industry structure. To this end, multiple effects of quality improvements are identified. The managerial conservatism in taking risky product innovations, which is resulted from the obliteration of the cost-adjusting effect by trivial incentive weight, is aggravated by foregone conservatisms. This leads to the widening of the quality gaps between it and the leading firm, and the deterioration of its market performances. After fulfilling an innovation, however, the firm becomes complacent. Driven by these two tendencies, the percentage of the industries in which the following firms abandon their R&D activities forever is decreasing in their incentive weights and increasing in time. The extensions of the process innovation, the managerial innovative agressiveness, and the interactions between product innovation and process innovation are also examined, as well as the implications of the compensation structure of the leading firm and the spillovers.