Don't Offer Employees Big Rewards for Innovation
It stands to reason that if you want your employees to come up with high-powered ideas, you need to offer high-powered rewards. That's why Google created its Founders Awards to provide stock worth up to several million dollars as an incentive to innovation.
But our research shows that high-powered rewards are no better than low-powered incentives at producing radical innovations. They may generate excitement and high hopes, but they result in few breakthrough concepts.
High-powered incentives do produce a flood of ideas, but that's not necessarily a good thing—a flood can be overwhelming, leaving companies unable to act on many of the ideas. You're better off implementing low-powered rewards, which are much cheaper and yield a more manageable stream of ideas.
The basic question that motivated our research—Should firms reward their employees for innovative ideas?—is far from settled, even after years of research. Various management scholars, for instance, have argued that rewards are hard to administer and may corrupt employees' motivation and creativity. Nevertheless, many firms continue to reward good ideas: 3M and Google allow employees to spend 15% to 20% of their time on projects of their own choosing, and other companies actively solicit suggestions or stage innovation tournaments.
To study the effectiveness of rewards, we used a simulation model—an unconventional but powerful tool. A simulation model provides a virtual "laboratory" in which researchers can manipulate every variable of interest (the reward level, say) while eliminating noise such as inappropriate management intervention. Simulated people are programmed to act like real individuals.
Our goal was not to mimic the innovation process at any specific firm, but to develop a model that was as simple as possible without oversimplifying. The virtual organizations we designed consisted only of employees that could search for ideas and a top management that selected the best ideas and shared a part of their value with the inventor. Low-powered rewards typically shared 5% to 10%; high-powered shared roughly 30% or more.
The model's underlying assumptions are based on past empirical findings—for example, that employees respond positively to incentives but become discouraged by low odds of securing a reward or by being overlooked. We also made sure our model reproduces what we already know about the innovation performance of real companies.
The beauty of a simulation is that once you've set it up, you can let it run, much like a Sim City game, and then puzzle out its results, some of which may be surprising. Our model provided valuable insights about incremental innovation in large firms. As our simulated employees responded to their firms' offer to share a large amount of an idea's value with them, they put more effort into the search for innovations, and ideas poured forth. The companies were quickly hampered by what we dubbed the "congested project pipeline" effect: Because taking action would have required investing resources such as management attention, the firms were unable to act on most of the ideas that were generated. (This effect doesn't apply to small firms, where the pipeline rarely becomes congested.)
As employees competed for space in our simulations' increasingly crowded idea pipelines, more and more came away empty-handed and gave up trying further. This demotivation reduced their effort and prevented them from putting in the time and energy needed to come up with breakthrough ideas.
Could this have been why Google cut back its Founders Awards in 2007, switching to smaller rewards instead? Google hasn't revealed the reason, but we wouldn't be surprised.
We found in our model that low-powered rewards such as 10% of the idea's value produced a healthy number of ideas (the vast majority of them, course, being incremental ideas) without clogging the pipeline or crushing employees' hopes. Corporate practice seems to bear this out: A recent comparison of the idea-management systems at 105 German firms between 1980 and 2011, for example, suggests that rewards for valuable innovations often range between 5% and 15%. A 2005 survey of 306 German companies showed that ideas yielding a return worth 1.4 billion euros had been rewarded by incentives totaling 159 million euros, or about 11% of the ideas' value.
Some companies take a tiered approach to incentives. Volkswagen, for example, shares up to 50% of the value of small ideas, but only up to 10% for high-value ideas. That makes sense, because a company can easily act on a lot of small ideas, such as "If we change the position of these two machines, the production process is shortened by one second," but can implement only a small number of big ideas.
But because breakthrough ideas are so rare, a simple reward system is unlikely to generate many of them. To get more breakthroughs, the best approach is to focus on increasing the variety of ideas that are generated. Past research suggests you might need a culture or organizational structure that encourages play, serendipity, and random interaction. A few companies are experimenting, counterintuitively, with switching the focus from success to failure, rewarding employees who dare to stick their necks out: At Google's lab X and at WPP's advertising firm Grey Group in New York, employees can be rewarded for brilliant failures that provide some sort of insight, even if they turn out not to work. Similarly, at the Tata Group's regional and global innovation contests, a rubric named "Dare to Try" provides rewards for failures that are informative.
Programs such as these help people get over the fear of failure and stimulate employees to stretch themselves—to go far beyond the "acceptable" innovations that they think management wants to hear.
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