It is rare to find a C-level executive who doesn’t recognize that innovation is critical to the continued success of their organization. According to a recent Accenture study, “Why Low Risk Innovation is Costly” 93% of CEOs feel that the long term success of their organization’s business strategy depends on their ability to innovate. Of that 93%, fewer than one in five believe that their strategic investments in innovation are paying off, and even worse, this poor track record is starting to discourage their employees from taking risks.
This isn’t uncommon. Incentives and innovation are a vicious cycle – companies invest money in innovation only to find that their organization has become less innovative. If you find yourself trapped in this cycle, think carefully about how your compensation plan may be impacting creativity and risk taking within your organization. Exploring your compensation model in four key areas may give you the spark of inspiration you need to build a truly innovative organization.
- Rethink your salary structure. In Dan Pink’s book, Drive, he builds a strong case that any amount of salary above a hygiene factor (the amount required to take your mind off of money) has little to no impact on employee motivation. In fact, when a salary is structured as a pay-for-performance model actually decrease the amount of innovation within a company as creative thinking and risk tolerance fall. Hence the vicious cycle. Pay for performance compensation, where employees are paid based on performance against pre-defined goals, has become increasingly popular since the 2008-2009 recession. Compensating employees based on performance has been shown to decrease problem solving ability (see Jim’s blog), creativity and risk tolerance – all critical elements of successful innovation.
- Stop paying big innovation bonuses. Another standard in innovation compensation is to offer the carrot of a financial bonus to employees with an innovative idea. Employees are paid a bonus when they complete a patent application, a second bonus when the patent is accepted, and an even bigger bonus when the idea goes to market. An example is Google, who created their Founders Awards to provide stock worth up to several million dollars as an innovation incentive. Large bonuses generate a surge of excitement in a company, resulting in a flood of ideas, beyond the capacity available to process and pursue these ideas. Employees walk away discouraged and give up trying further. Not all bonuses, however, are bad. Small bonuses, in the range of 5-15% of the idea’s value, can generate a healthy pipeline of ideas without overwhelming your process. In 2007, Google cut back its Founders Awards, switching to smaller rewards, and Volkswagen has had success with a model that shares up to 50% of the value of small ideas, but only up to 10% of high-value ideas.
- Reward failure. While many companies talk a good talk around innovation, there are often cultural barriers that discourage risk taking. Employees are hesitant to put their jobs on the line for a risky idea. To combat this, consider rewarding employees for the lessons learned out of failed ideas. At Google’s lab x, employees can be rewarded for failures that provide some sort of insight, even if they turn out not to work. Intuit hosts a company-wide award ceremony where a “Failure Award” is given to a team whose unsuccessful idea resulted in valuable learning. Public acknowledgement, and even celebration of what has been learned from failure creates an environment where thoughtful risk taking is encouraged, and creativity results.
- Pay with time, not money. Some of the most innovative companies don’t pay their employees for innovation – at least not in the form of bonuses or variable compensation. They invest in innovation with time – providing employees with the free time to dream of and research innovative ideas. Two notable successes are 3M, whose iconic post-it note came out of their 15% innovation time, and Gmail, generated by Google’s policy of giving employees a day a week to follow their passions. If a company isn’t investing time in innovation you can venture a guess that innovation is likely an afterthought.
Throwing money at your innovation problem really isn’t innovative after all. Being creative, clever and innovative about compensation will create an environment where ideas can grow and innovation can thrive.
One final note of personal exception: While the compensation ideas mentioned above may unlock your company’s potential, I thought it important to note that I personally innovate best with a big salary, large bonuses, plenty of free time and when failure is well rewarded.