Everyone would agree that the rational risk-taking–and acceptance of failure as a likely outcome of any exploratory project–represents one of the most crucial components of the bona fide culture of innovation. What is missing in our endless talks about establishing the culture of innovation is which practical steps organizations should take to promote and encourage entrepreneurial spirit of their employees. A couple of studies (nicely summarized in a Harvard Business Review article) shift this conversation from pure talk to specific actions.
The first study (published in the Journal of Financial Economics in January 2015) showed that companies that offered stock options to non-executive employees were more innovative. The positive effect of stock option grants on innovation was more pronounced when the average expiration period of options was longer. It was also demonstrated that the employees involved in innovation activities treated stock options as an incentive to risk-taking rather than an award for superior performance.
Another study (dating back to April 2011) found that certain labor laws that make it more difficult for firms to fire employees increased the engagement of the employees in innovation activities. The authors of the study called this phenomenon the “insurance effect” and argued that the lower threat of termination produced by stronger anti-dismissal laws decreased the “cost of failure” for employees to engage in potentially risky projects. As a result, these employees were more willing to take on innovation projects relative to their engagement in routine projects.
Uniting the both studies is an idea that long-term incentives may have a strong positive effect on innovation. As the HBR article puts it:
“If workers feel pressure to deliver results in the short-term, either for fear of being fired or in order to be promoted, they may be less likely to pursue riskier innovations. On the other hand, if failure in the short-term is acceptable or even rewarded, and if workers have a stake in the company’s long-term performance, they should be more likely to innovate.”
The beauty of the above findings is that they’re easily testable. To do so, companies can introduce these purely administrative policies:
- To make stock option grants the principal incentive for engagement in innovation projects (as opposed to cash bonuses and the plethora of non-monetary recognitions and rewards).
- To place employees involved in innovation projects on fixed-term employments contracts (as opposed to employment-at-will). Creating tenure-like job arrangements for people involved in strategic innovation initiatives could be another option.
In more general terms, a message that all organizations should hear is that treating employees well will make these organizations more innovative. It’s this simple.
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