Use Compensation to Inspire Innovation

Innovation drives business and productivity. Those organizations that consistently challenge themselves and their employees become market leaders. However, many companies are risk adverse, relying on compensation models and incentive programs that support the status quo instead of encouraging employees to achieve ambitious goals.

Incremental Innovation

One reason companies may shy away from propelling creativity is the lack of a balance sheet that’s strong enough to support innovation—and withstand the risk that some new initiatives might not succeed. This does not mean those companies need to discourage allrisk. They can benefit by focusing on “incremental innovation.”

When a company focuses on incremental innovation, the need to change the entire structure of the organization is minimized. For instance, the company can:

• Continue with its current operational structure, but add a modest rewards program that incentivizes individuals or teams to promote innovation within their own domains.

• Creative teams can drive quicker results by focusing on incremental goals, such as product line extension opportunities and operational efficiency improvements.​

Exponential Innovation

If an organization has the resources and corporate culture to support organization-transforming “exponential innovation,” greater short-term risk is involved—with the prospect of greater success in the future. The structure and compensation models for such risk need to be aligned. Possible issues with this restructuring include:

• If innovation teams reside in the same entity as core business teams, then it may be difficult to differentiate their compensation packages within the same pay grades. Jealousy and inconsistency can stymie motivation quickly. Expansion of pay ranges by pay grade level could be a possible solution.

• If separate entities are created to house innovation teams, it could prove more difficult to transfer resources between the core business and innovation sectors. Again, animosity between the groups needs to be avoided through fair pay and effective communication.

Creating a Compensation Model for Innovation

A compensation model that encourages innovation should strike a balance between the risks and rewards associated with the work. Entrepreneurs and initial investors who launch a new company take on the risk of losing their wealth. If the venture succeeds, they are rewarded for that risk handsomely. In a mature organization, employees might not be taking a risk with their own savings, but they are risking future compensation and, possibly, career stability. Effective strategies to reduce this risk include:

• Create a safety net by implementing a structure for employees to move from high-risk innovation projects back to the core business. This removes risk from the innovation work and can be a great alternative if employees’ original innovation projects were cancelled or shut down. It encourages them to take on high-risk initiatives they might have avoided otherwise.

•Reward risk-taking through bonuses, titles and in-house perks. In a perfect world, taking on risks would not affect a career negatively.. However, very few executives rise to become CEOs based on their failures. Risk-taking can lead to failure regarding any specific new initiative, but fostering a culture of continual innovation lays the groundwork for long-term success, and those who support that effort should be rewarded.

• Create rewards programs that recognize innovation within all elements of a company. A culture of innovation needs every employee to contribute from within their own function. Human resources, finance and marketing are all critical support centers to drive innovation forward.

With a thorough analysis of an organization’s tolerance for risk, current compensation models and, ultimately, desire for innovation, a new framework can be established that provides appropriate incentives to fuel new ideas.

Matt Hunt is a professional speaker, blogger, consultant and founder of Stanford & Griggs LLC.

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