Nov 22, 2008

HR - Incentives for Innovation

Radhika Chadha

How can organisations ensure that short-term business goals are met while encouraging managers to experiment for the long-term?.

Very few innovation systems recognise the need for aligning the performance management system to innovation strategy.

‘An incentive is simply a means of urging people to do more of a good thing and less of a bad thing. An incentive is a bullet, a lever, a key: an often tiny object, with astonishing power to change a situation. We all learn to respond to incentives, negative and positive, from the outset of life.’

Steven Levitt and Stephen Dubner, Freakonomics

I was recently invited to watch a creativity workshop being conducted by a consultant visiting from abroad. The client was a software company that had decided its employees needed to be trained to deliver innovative solutions – the idea was tomove beyond pricing as a differentiator in these increasingly competitive times.

The audience was junior to lower-middle level managers and software engineers who huddled around the huge conference table in eager anticipation. The table itself looked like a kid’s playroom, chock-a-block with interesting thingummyjigs — furry wire worms, rubber bands of all shapes and sizes, Lego bricks, cards with provocative statements on them — meant to add an element of additional zest and fun to keep them creatively engaged.

The fun and games part went off well as the consultant enthralled the team with his stories about ideas that worked and bombed, and about tools for idea generation. Towards the end of the day, the facilitator started the wrap-up by stating emphatically that it was quite simple for these techniques to be used in their day-to-day jobs and that each employee should think about how to perform their role differently.

At this, the hitherto chatty group fell silent and shifted about uncomfortably. There was a palpable sense of unease and you could actually feel the charged up energy dissipating rapidly. Finally, one brave soul voiced the collective concern — “Why?” Slightly taken aback, the consultant threw back the question: “Why what?”

“Why innovate, why be creative?” asked the self-appointed representative. “We’ve got our operational goals and those are tough enough to meet. I work 24/7 just to keep up with my targets. Now you are asking us to do our jobs differently and that will take even more effort and maybe I will not achieve the outcome I plan because I am experimenting with innovative approaches. If I ignore all this and continue as normal, I will get my salary and my bonus anyway. If I try all this and I succeed, at the most I will get a badge or a jacket as a reward. Why bother?” The rest of the group nodded in agreement while the trainer and the senior management looked at each other uneasily as the conversation segued into unplanned territory.

Probably, this is what many feel at the end of such workshops — it so happened that here was someone willing to articulate their unease. The point is, it is not enough to simply exhort employees to “be innovative”, or run initiatives for changing culture or mindsets. Organisations that wish to be disruptive, to change their professional DNA, need to consciously provide incentives for innovation.

Very few innovation systems recognise the need for aligning the performance management system to innovation strategy. In the innovation context, the bullets that Levitt and Dubner talk about should cover two aspects — first, a set of metrics that make sense for new products and businesses and incentivise new business creation rather than current profits or revenues — my last column discussed this. The second, and equally important, is how organisations use incentives to change managerial attitudes towards innovation and risk-taking.

This is easier said than done — creating incentives to change organisational behaviour with regard to creativity and risk-taking is one of the most challenging tasks on the innovation agenda. On the one hand, we need innovation for long-term survival. On the other, short-term business-as-usual demands incentives that trigger efficiency and profitability improvement. Balancing the two is tricky — but essential.

An effective innovation incentive system would spur idea generation and innovative behaviour. A bad system can give rise to unwanted projects, or, what can be worse, many ‘unborn babies’ — valuable ideas that should have been given birth to, but were squelched in the minds of their creators. These negative outcomes could be because of fear, disinterest, or lack of encouragement, many of which can be traced back to the way incentives are planned and evaluated. An example: EVA (economic value added)-based performance management is fast becoming the system of choice. However, its focus on short-term financial measures is the opposite of what innovation incentives should be. Indeed, a substantial proportion of managers believe it affects their risk-taking ability.

When we get into the details, one debate that always comes up is whether financial incentives are better than non-financial ones. There seems to be a universal belief that innovators prefer recognition to monetary rewards. Actually, it would be a rare manager who would refuse a financial reward, but let that pass. Most innovation incentives appear to revolve around schemes (but without rewards), and an annual award for the most innovative idea. As the HR head of a large conglomerate, says, ‘These are signals to the team of what is important to top management.’ Perhaps, but one award a year may not be enough when the desired outcome is a flood of innovation across levels — the equivalent would probably be to hand out a bonus to just one employee each year.

In fact, there is a body of research that questions whether extrinsic rewards work at all in stimulating creativity, arguing instead that this is better spurred by the curiosity, challenge, interest and satisfaction in the job. Ideally, incentives should feed into career growth with innovative thinking treated as a critical component of managerial competency while awarding upward mobility. The manager who sticks his neck out hopes to get recognition and climb the corporate ladder in reward. Career advancement is the most obvious way in which organisations can reward innovative thinkers — and this would offer both recognition and financial benefits in one stroke.

Here are some questions for incentive designers to ponder — does the organisation walk the talk? What sort of an example is being set at the top? Who are the heroes in the organisation — the innovators or the harvesters? What sort of behaviour does senior management demonstrate?

If an organisation wants to celebrate risk-taking and innovation, then it should also reflect this in the appraisal and career planning at every level. If employees are to live and breathe innovation then they should also see tangible evidence of how such behaviour is being rewarded.

(Radhika Chadha is a consultant in strategy and innovation and co-author of Innovative India: Insights for the Thinking Manager. Karate-gy is the proprietary name of the strategic exercises conducted by Paradigm Management Knowhow Ltd.)


Ben Simonton said...

It is not about incentives, Radhika. It is about leadership.

If employees are treated like they are valuable to the organization, they will become valuable to the organization. If not so treated, they will never be valuable, will never bother to be creative, innovative or productive.

This comes from the top. If the top chooses to manage people using the traditional top-down command and control approach, employees quite naturally become demotivated and demoralized, ordered around as if they are robots.

If, however, the top decides to use the reverse approach, that of bottom-up, this will unleash each employees full potential of creativity, innovation, productivity, motivation, and commitment. It is quite simply management's choice. Exhorting employees is just more ordering them around and no one likes to take orders.

Don't you think people are smart enough to realize that incentives are just a way for management to buy them off while still treating them as if they are robots? Incentives don't cause big performance improvements, often just the opposite as employees learn how to "game" the system just as management is trying to "game" them.

To learn more about a superior leadership strategy, please read these Leadership Articles starting with the article "Leadership, Good or Bad".

Best regards, Ben

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