Using Carrots to Incentivise Innovation

When considering innovation and great innovators our first thought is probably of Steve Jobs, James Dyson, Mark Zuckerberg or other extremely self-motivated founders of tech firms. Unfortunately most of us do not fall into this category, and most organizations cannot rely on their employees, however conscientious, to be driven by passion alone to achieve ongoing innovation. We need some carrots.

In fact designing an optimal and strategic incentives system is key, says Singapore Management University Professor Thomas Menkhoff, in a recent article.

Optimal because: although rewards and recognition are critical in encouraging a robust innovation culture, they can also backfire. Managers should be very cautious about over-rewarding or setting quantity targets that undermine the quality of their innovations or destabilise a productive innovative culture, thus undermining the future innovation capabilities of the company.

According to Menkhoff “Even the best intended practices can provide disincentives for the right (innovative) behaviour. The promise of tangible monetary rewards can erode one's intrinsic motivation which is critical for breakthrough innovations.” Rewards for success can cause envy and disengagement if perceived to be unfair, and rewards can be counterproductive if believed to be below market value. Equally a failure to support greater innovativeness through risk-aversion, or to implement newly proposed ideas, or to sensitively manage innovations initiatives that fail can greatly damage future creativity and commitment to innovation.

In extreme cases, as with the pre-crash banks that motivated employees with special bonuses and huge incentive awards, or the ‘dotcom bubble’ businesses that placed too much focus on downstream financial rewards, a mismatch between rewards and innovative effort can be disastrous; and of course disaster also struck those like Kodak or Blackberry who failed to innovate effectively.

Research and practise shows that rewards and recognition are critical management tools to encourage employees to innovate. The question is how to create an organizational incentive framework that supports radical innovative behaviour, while avoiding the potential risks?

Professor Thomas Menkhoff suggests that, when designing an incentive framework to support innovativeness, managers need to distinguish between incentives, such as financial compensation, which kick in before an innovation project starts; and rewards, such as recognition in the form of publicly showcasing innovative employees, which might then encourage people to continue to innovate long-term.

He also suggests that incentive systems must specify and reinforce strategic and long-term innovation goals by recognizing intermediate roadmap targets, rather than objective measures, such as speed to market or new product sales targets; and that innovation goals and exploration activities need to be integrated into the corporate performance measurement system.

“Innovation KPIs incorporated into a balanced innovation scorecard must leave enough room for trial and error, experimentation, exchange of ideas and learning.” Says Menkhoff. Individual performance should be considered alongside team evaluations, and it is important for leaders to be sure they are measuring what is truly important for their business. For example it might be wise to reward a team whose innovation initiative failed but taught valuable lessons, to encourage their future commitment to innovation.

Providing highly incentive-intensive financial rewards which are closely tied to the value that a very few outstanding people have created can cause corrosive rivalry and envy. So in some case a better option might be to stimulate innovation through a robust culture of innovative intrapreneurship, which might then lead to many incremental innovations and a few radical ones.