Want More Innovation? Offer Lower-Value Rewards

Generally, I’m leery of academic research of workplace scenarios. It can be difficult to mimic all the nuances and vagaries of people, how we interact and how we behave. But academic simulations can provide fodder for thoughtful consideration and comparison to your own organization and experience.

Consider this research reported in the Harvard Business Review blog and conducted by management professors from the University of Southern Denmark and the Frankfurt School of Finance and Management.

The Test

Fundamentally, the professors wanted to see if offering employees more high value rewards for innovation would generate a better innovation pipeline than offering low value awards. In their own words:

“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.”

My own experience consulting with companies of all sizes and stripes bears this out. We think of it in terms of the “winners’ circle.” When all employees know only the top 10% of high performers will ever be eligible for recognition and associated rewards, the “mighty middle” – the 70% of employees in the middle of the performance bell curve who are consistent performers day after day – become discouraged and disengaged. Who can blame them? In such a structure, they often come to see themselves as “losers.”

The goal should be to properly calibrate your awards approach (more on this in a moment) so you can reach far more employees with recognition rewards, thereby creating a much larger winners’ circle.

The Findings

Giving large rewards exclusively works against a company’s intended goal, actually delivering the opposite of the desired results. The findings of this study on innovation bears this out:

“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.

“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.

“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.”

This is where calibration of reward value plays an important part. If the goal is encourage a culture of innovation, then several award levels that recognize contributions to idea generation, execution and ultimate result are more appropriate. Rewards (and amount of reward) depend as much on level of effort, impact and result as on contribution of ideas. This kind of structure not only encourages innovation idea generation, but also willing hands to bring the ideas to fruition and all that process entails.

How are rewards structured in your organization? Do they tend to more high-value awards given infrequently to few people or many lower-value awards given to multiple people more frequently?

 As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin, Montreal and Boston. Follow Derek on Twitter at @DerekIrvine.

Comments

[Tony]

Although I do support the thrust of this good article I do find it frustrating when practitioners and managers only trust academic research that backs up their current thinking. I tend to believe the only way to improve my thinking is to read and challenge research that is counter to my current thinking.

[E. James (Jim) Brennan]

Academics are required to follow the scientific method in their published research, unlike consultants, who have been known to shade their conclusions and recommendations to maximize their income opportunities. That said, it is always a good idea to challenge assumptions (you know what they say) and test "proven" hypotheses.

Ivory tower environments frequently produce different experimental results than the real world, as seen all too often in populist circles. Check the process methods, consider the variables and see if the tested conclusions prove valid under all circumstances. Academics are required to do that, while many others are not; so professionals are well advised to take any research for what it is worth.

[Tony Bergmann-Porter]

'When all employees know only the top 10% of high performers will ever be eligible for recognition and associated rewards, the “mighty middle” – the 70% of employees in the middle of the performance bell curve who are consistent performers day after day – become discouraged and disengaged. Who can blame them? In such a structure, they often come to see themselves as “losers.”'

It's interesting to juxtapose this thought with exhortations about how we need to manage "merit" pay to ensure that the highest performers receive dramatically larger salary increases than everybody else.