Want employees to think outside the box? Start by taking a good, hard look at how you’re paying them.
That’s the implication of new research examining the impact of different compensation structures on employee innovation. While there is endless handwringing about what management can do to inspire workers, key issues such as how employees are paid and how they view the scope of their jobs can be crucial to their willingness to contribute ideas that help the company thrive, says Susanna Gallani, assistant professor at Harvard Business School.
Companies that design compensation systems that aim to focus employees on a particular task and base their pay on the workers’ performance need to be aware of the potential tradeoff when it comes to the willingness of workers to develop innovative ideas, she says.
“Companies want more employee-initiated innovation, but it has proven very challenging to obtain.”
In a study of a Chinese manufacturer that encouraged factory workers to submit innovative ideas to bolster the company’s operations, Gallani and her colleagues find that providing certain perks and incentives for task-based performance may actually deter big-picture innovation. Why? Because workers focus too narrowly on how to achieve those objectives, rather than looking beyond the scope of their role to improve the business more broadly.
Gallani conducted the study—which was published in the journal Contemporary Accounting Research—with Wei Cai, an assistant professor at Columbia Business School, and Jee-Eun Shin, an assistant professor at the University of Toronto’s Rotman School of Management. The paper urges managers to carefully consider “the spillover effects” when designing compensation contracts to avoid unwittingly discouraging innovation by their employees.
The findings are particularly relevant at a time when the economy is clouded by recession concerns and companies in industries across the world are searching for ways to instill a spirit of innovation, with Google expecting employees to spend 20 percent of their time working on new ideas.
“Companies want more employee-initiated innovation, but it has proven very challenging to obtain,” Gallani says. “There is a disconnect between demand [for innovation] and supply.”
When the job description really matters
The study came about in part through Cai, who connected with a Chinese company interested in upgrading its management techniques. Hoping to spur employees to develop ideas for bettering the company’s performance, the firm launched a system in which workers who put forth ideas were recognized with small sums of money. The company carefully recorded the ideas that employees submitted and shared its data with the research team.
Gallani and her coauthors were then able to match the ideas proposed by the workers with the type of employment contracts they were working under. In researching about 512 employees between 2014 and 2016, they found that about 15 percent of employees had submitted a novel idea in the previous month.
Workers with “variable pay” contracts—earning roughly the equivalent to hourly pay for workers in the US, with wages tied to their level of production and work quality—were just as likely as other employees to propose new ideas when it came to “narrow-scope innovations” having to do with their particular task, the authors find. For example, a machine operator might suggest ways to limit mechanical breakdowns that are lowering output and reducing the worker’s pay.
But the same workers were 47 percent less likely than employees with fixed-rate contracts, which are equivalent to flat salaries in the US, to initiate “broad-scope innovation”—ideas to improve company morale, boost overall safety, reduce costs, or upgrade technology, and ideas that might benefit the company as a whole but have no relation to the worker’s job. That is, employees with fixed-rate contracts were more likely to propose broad-scope innovations, even when the changes would not benefit them personally.
It’s costly to think outside the box
Gallani says the study results showed the innovation gap wasn't due to production pressures that left workers too busy to suggest innovations, nor did it come from supervisors—predominantly on fixed-pay contracts—stuffing the box with ideas.
Rather, the dearth of bigger-picture innovation on the part of rank-and-file workers appeared to stem more from their narrower conception of what their job duties were, with employment contracts focused heavily on their particular task in the manufacturing process.
For these workers, things like proposing a morale-boosting monthly birthday celebration or suggesting that an awkward dividing wall be removed to boost communication between departments may feel like something outside their wheelhouse. Developing innovative ideas can also be costly for workers, taking time away from standard tasks they’re rewarded for.
The company “did not make a rational choice between the standard task and extra-role behaviors," Gallani says. “They wanted both, but by structuring the standard task contract in a certain way, they are less likely to observe employee-initiated innovation.”
Aligning incentives with expectations
So, can companies motivate employees to focus on key tasks while also encouraging bottom-up innovation?
Companies might consider some different incentives, Gallani says. The manufacturer in the study rewarded employees for their ideas with fairly small monetary awards. Increasing the size of the award—whether it’s more money or some other benefit—could help increase participation, she says.
Crediting employees for submitting ideas when considering promotions might also provide another incentive, as well as publicly recognizing innovative workers, Gallani suggests.
“There is a little bit of a tradeoff between pay for performance and extra-role behaviors, such as innovation.”
Her advice to managers: “Do whatever you can do to shape this idea of your responsibilities within the firm.”
At the end of the day, companies need to consider whether strong incentives designed to boost productivity—and keep workers locked in on the task at hand—also leave flexibility or space for innovation to flourish.
“Managers who want to push performance very strongly shouldn’t expect employees to engage in extra-role behavior as much,” Gallani says. “There is a little bit of a tradeoff between pay for performance and extra-role behaviors, such as innovation.”
You Might Also Like:
- What If Closing the Wage Gap Means Everyone Earns Less?
- Nominal and Opportunity Effects of Managerial Discretion
- Post-COVID Health Care: More Screens, Less Red Tape?
Feedback or ideas to share? Email the Working Knowledge team at hbswk@hbs.edu.
Image: iStockphoto/miodrag ignjatovic