Performance incentives can put innovation



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Managers seeking to create social conditions that lead to open, diverse and extensive networks – known to drive innovation – should avoid implementing performance incentives that rely on quantitative and short-term performance measures. . According to new research published in the Strategic Management Journal, these salary incentives translate into more closed and smaller networks in organizations, suggesting that managers can use incentive schemes to design innovation networks in their organizations.

The study, titled “Pay and network in organizations: Incentive redesign as a driver of network change”, was published on August 26 and authored by Hitoshi Mitsuhashi, School of Commerce at Waseda University in Tokyo, and Azusa Nakamura , from the Department of Management and Technology at Bocconi University in Milan.

“[F]From the point of view of practitioners, our results highlight the role of managerial policies in the formation of networks in organizations, ”the authors write.

Mitsuhashi and Nakamura sought to answer two questions in particular, based on the gaps in existing research: what can managers do to create social conditions that favor certain networks that are preferable for achieving their goals? And what management policies are available if they want to exert some influence over the networks in their organization?

What was known from existing networking research – and what Mitsuhashi and Nakamura built their study on – are the types of networks that increase work performance and how these preferable networks emerge.

For their work, the study authors focused on shifting the incentive plans from those who weakly tie short-term individualized contributions to compensation to those who tie them tightly. For example, moving from seniority-based compensation to a performance-based incentive plan.

They also looked at the effects of such an overhaul of incentives on innovative companies, arguing that the change would lead to two particular habits in employees: they would produce more measurable short-term results, and they would seek a fair share of the credit on employees. results they achieve jointly with others in their networks. These habits, according to the authors, encourage innovative companies to create easily manageable networks to quickly execute projects and be rewarded.

To test the theory, Mitsuhashi and Nakamura used patent application data from Japanese electronics companies, focused on co-innovator networks, and adopted a quasi-experimental research design. They chose Fujitsu Limited and NEC Corporations as the treatment group, and the performance-based incentive plans of the companies as the treatment effects. The researchers performed difference-of-difference analyzes (DID) and estimated the effects of the incentive plans by comparing individual employees before and after the plans went into effect with individuals in the control groups.

Based on interviews with innovative companies who have experimented with redesigning incentives in these companies and HR experts who observed their responses, they found that three areas of change occurred when the incentive plans were redesigned for performance. First, they found that innovative companies have become more goal-oriented and more focused on achievement. Second, the short performance review cycle created a short-term focus in employees and increased their risk aversion. Third, the redesign of incentives made innovators more individualistic and they became more sensitive to who made what contribution, even discouraging others from claiming specific accomplishments as part of a team.

The results supported the authors’ theory that redesigning incentives leads to more closed and smaller networks in organizations. They also found evidence – albeit inconsistent – that this has prompted innovators to network with others who have similar expertise.

“A key message from these observations is that before embarking on an incentive overhaul, companies need to understand that, # 1, (this) influences the goals employees pursue, # 2, employees can adapt their networks with renewed objectives and, not 3., the updated networks might not be the ones managers prefer, ”Mitsuhashi says.

While the findings help deepen understanding of compensation and networks in organizations – and highlight their intersection – they offer practical advice for managers: moving to a pay-for-performance incentive model that relies on metrics. Short-term and quantitative performance could risk innovation within the organization.

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The Strategic Management Review (SMJ), founded in 1980, is the world’s leading mass impact journal for strategic management research. The SMJ seeks to publish articles that pose and help answer important and interesting questions in strategic management, develop and / or test theory, replicate previous studies, explore interesting phenomena, review and synthesize existing research, and assess the many methodologies used in the field of management.

SMJ is published by the Strategic Management Society (SMS), an association of 3,000 academics, business professionals and consultants from 80 countries that focuses on the development and dissemination of information on the strategic management process, as well as on promoting contacts and exchanges. around the world. To learn more about SMS’s science and education programs in strategic management, please visit www.strategicmanagement.net.


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