The idea that innovation involves experimentation—and experimentation often results in failures–has gradually crawled to the forefront of our thinking about the innovation process. It became fashionable to quote Amazon’s Jeff Bezos as saying that high tolerance for risk and failure accounts for his company’s spectacular performance.
What troubles me in our newly-acquired passion for innovation failures is the deafening silence on the issue of how this positive attitude towards failure is to be promoted within organizations. We don’t send firefighters to extinguish fires without providing them with protective gear. We don’t send cops on the street without giving them tools of defense against dangerous criminals. Why then do we ask our employees to put their careers at risk by taking part in failure-prone innovation projects without assuring them that they won’t be punished should these projects fail?
I believe that instead of endless (and largely hollow) talks about “promoting risk-taking” and “celebrating failures,” we must design specific policies that would make it safe–or, better yet, attractive–for employees to engage in corporate innovation activities.
Academic research provides enough guidance with respect to what these policies should be. Theoretical analysis conducted by Gustavo Manso in 2011 showed that that the optimal incentives motivating employees to innovate must include a combination of tolerance for failures in the short term and reward for success in the long term. Tolerance for early failures allows the employees to take risks at the initial stages of the innovation process without incurring the negative consequences of failed projects. The reward for long-term success encourages the employees to explore risky ideas that may allow them to achieve innovation breakthroughs in more distant future.
Subsequent empirical studies have confirmed Manso’s theoretical reasonings. For example, Viral Acharya and co-authors analyzed the impact of the so-called wrongful discharge laws on corporate innovation. These laws provide employees with greater protection than employment-at-will when employees can be terminated with or without just cause. The authors have shown that the wrongful discharge laws, particularly those that protect employees from termination in bad faith, foster innovation by increasing the employees’ motivation and effort.
On the reward side, a recent work by Xin Chang and co-workers has provided evidence that companies offering stock options to non-executive employees are more innovative. The positive effect of stock option grants on innovation is more pronounced when options are granted to a wide range of employees and when the average expiration period of options is longer. Very importantly, the analysis reveals that the employees involved in innovation activities treat stock options as an incentive to risk-taking rather than an award for superior performance.
The above findings suggest that the firms should change they way they treat employees engaged in strategic innovation activities. Here, I want to offer two specific recommendations:
- To place employees involved in strategic innovation projects on fixed-term employment contracts (as opposed to employment-at-will). Alternatively, tenure-like positions may be created for the same employees. Whatever the arrangement, employees should be assured that they have a fixed “window of opportunities”—say, five-six years—to make progress in their projects before any administrative decisions regarding their employment will be considered.
- To make stock option grants the principal incentive for engagement in innovation projects–as opposed to cash bonuses and multiple non-monetary recognition and rewards.
I fully realize that the proposed recommendations will require firm-specific adjustments. But both are perfectly testable. Large firms may try an A/B test of sorts by implementing these specific policies in some divisions but not others and later comparing the innovation outcome in both groups.
The bottom line is that we must finally move from words to deeds when dealing with innovation failures. Providing people with immunity from failures is much better than “celebrating” them.
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The image credit: https://www.pinterest.co.uk/pin/206180489167099032/