Blog post 2

Innovation Blog Post 2:  Organizational incentive and effect on Innovation

This article, entitled “Do Organizational Incentives Spur Innovation” by Henrique M. Barros and Sergio G. Lazzarini, addresses whether there is a relationship between employee innovation and various incentives offered by the employer.  Since it is important to both remain competitive with other firms, as well as retain productive employees, it stands to reason a firm would benefit from rewarding employee innovation.  This article tests two different hypotheses regarding incentivizing innovation. 

The first hypothesis is stated in the article as “Firms that adopt incentive systems that include higher performance based pay will be more innovative.”  Hypothesis 2 is stated from the article as “Firms that adopt incentive systems associated with higher performance based promotion will be more innovative.” 

The method of testing the above hypotheses consisted of randomly surveying 370 firms across multiple functional areas.  Innovation was measured in survey form by questioning whether a relationship exists between innovation and increased revenue within the firm. 

Key findings regarding incentive pay and promotion in relation to innovation are consistent with past studies regarding pay, and shed new light regarding promotion.  According to the article’s findings, providing incentive pay for innovative employees provides marginal benefit to the firm, while promotion of said employee appears to have more of an impact.  The article also states that as a caveat, there is a level if diminishing returns regarding promotion.  Up to a certain point, innovativeness tends to level off, while this is dependent upon the type of firm, size, and scope. 

Implications for managers are vast.  This article supports the notion of maintaining open communication between management and employees.  It also helps to justify some level of research and development within the firm.  Training is also important, especially in quickly high-tech industries such as software and computers.  Employee retention and employee perceived equity are also improved when the employee is able to not only contribute to the firm’s success, but share in its rewards.  According to the article, implementing a promotion based program tied to innovation also fosters new ideas, providing a mutually beneficial relationship between the firm and the employees.  Recruitment is another factor positively related to promotion based innovation.  The article suggests that firms and their managers will see an increase in revenue tied to innovation by rewarding employees with both compensation and promotion for their innovative ideas once they prove to generate an increase in revenue.  The sharing of this increased revenue along with promoting those employees who are innovative is shown to be beneficial to all parties involved according to this article. 

Article reference: BAR, Rio de Janeiro, v. 9, n. 3, art. 4, pp. 308-328, July/Sept. 2012

www.anpad.org.br/bar