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Encouraging innovation through the use of pay incentives


On Forbes.com, Donald Delves discusses ways in which pay can encourage innovation.

"Perhaps nothing is more necessary for the growth of companies than innovation," he ventures. He also points out that a company can't develop new products without a system for fostering and nurturing their best ideas. This is often recognised through compensation programmes designed to encourage innovation with pay incentives.

However, Delves warns: "This seemingly sensible approach can backfire and limit innovation. Real innovation too often involves unexpected ideas that come from unexpected places." Also, if the potential rewards have narrow definitions, the results will be similarly narrow and limited.

Therefore, Delves says companies need their managers to have a broad enough creative vision to be able to formulate big ideas for successful products, and employees have to be free to generate and share ideas rather than hoard them for personal benefit.


One solution is to reward executives retrospectively once the innovation has proved successful. Incentive pay can also be tied to sales figures for new products.

According to Delves, this approach "fosters broad vision because it motivates executives to consider virtually any idea for a new product" while at the same time injecting "a strong dose of pragmatism into the innovation process by requiring new concepts to go through a series of stages and tests to prove their viability and earn additional funding and resources".

Basing pay incentives on increased gross margins is especially suitable for technology companies, where the most innovative products are usually more expensive and have high margins when they first appear on the market. In other cases, pay according to sales might be more appropriate, especially where competitors can copy products fast.

Delves says: "When you use new-product sales metrics to measure how to pay employees for successful innovation, you can impose the kind of pay-for-performance discipline you associate with financial goals on an endeavour that traditionally has been treated as non-financial. At the same time you can improve your performance and pay for what shareholders really want: the future."

For encouraging innovation at store, plant, division or company level, the author recommends the establishment of special awards programmes where deserving employees receive awards in recognition as well as compensation.

Delves observes: "Without such encouragement, they can be reluctant to give voice even to innovations they've already thought of."

He adds: "Assuring that ideas from deep down in the company bubble up and are nurtured, funded, tested and refined takes a well-managed company with organisational openness, fluidity and discipline."

How Pay Can Encourage Innovation
Donald Delves