Financial Rewards Make People Suggest Fewer but Better Ideas 17/03/2021, 19:08

Innovation

Financial Rewards Make People Suggest

Fewer but Better Ideas
by Nicole Torres

From the Magazine (May 2015)

Employees have proven to be a

valuable source for innovative
ideas. Which is why more
companies are testing
crowdsourcing initiatives and

Tomasz Walenta
other ways to encourage people to
innovate. Offering financial
incentives has, for a long time, been one way to do this. But the
research on whether rewards actually yield more innovation is mixed.
On one hand, rewards can motivate employees to speak up; on the
other, they bring in a flood of ideas that aren’t really actionable. In
the pages of HBR, we’ve said to focus on culture instead of cash and
to avoid offering big rewards for innovation, because luring
employees with flashy prizes can kill intrinsic motivation.

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In 2010, one large Asian information technology services company

decided to run an experiment to see if rewards could actually improve
and encourage employee ideas. People could already submit
suggestions through an internal system, but the company wanted to
test whether rewards would lead to better ideas. The results of the
experiment were studied in a recent discussion paper out of the
Centre for European Economic Research. The authors, Michael Gibbs,
Susanne Neckermann, and Christoph Siemroth, found that when
financial rewards were on the table, more people contributed — but
on average, each person submitted fewer and better ideas.

The project arose when Gibbs learned that a former student of his at
the University of Chicago was in charge of value-creation initiatives
at the company (kept anonymous for confidentiality reasons) — and
that its internal system (the “Idea Portal”) provided a dataset on
employee ideas. He asked if he could use it for research. “This was
quite exciting as most research on creativity is field research based on
interviews, and is done by psychologists,” said Gibbs. “The
opportunity to do statistical/analytics research on new ideas is quite
rare.”

The company randomly assigned 19 teams (roughly 11,400

employees) to either a treatment or control group. The treatment
group would receive rewards for ideas that were accepted for
implementation. These rewards came in the form of points that could
be used at an online store. (The points program already rewarded
employees for things like good performance, project completion, and
job anniversaries.) If the idea was accepted, each member of the
contributing team got 2,000 points, which was worth about “2.2% of
monthly after-tax salary for lower level employees.” And people
could earn more if the client gave a good rating.

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Only higher-level management and those managing the rewards

program knew about the experiment, which lasted 13 months. Aside
from the incentives, nothing changed about the process: Employees
submitted ideas through the Portal (individually or in groups of up to
three), a supervisor reviewed them, and a panel of senior managers
decided which to share with clients. Those accepted by clients would
be implemented, and their results tracked.

The hope was that by offering rewards for accepted ideas, employees
would focus on ones that directly benefited clients instead of ones
that improved internal processes — and that people would go through
the Portal instead of trying to implement ideas on their own.

Analyzing the Idea Portal data from before, during, and after the
experiment, the authors found that when rewards were introduced,
more people participated, but there were fewer submissions per
person, and these were higher quality ideas — meaning they were
more likely to be shared with a client or implemented, or they had a
high estimated profitability — than those from people who weren’t
offered rewards. Employees at all levels were able to come up with
valuable new ideas. The authors said the fewer ideas per employee
couldn’t be explained by motivational crowding out, or the idea that
extrinsic motivators (money) undermine intrinsic motivation.
Instead, offering pay for accepted ideas seemed to focus people on
producing better ones.

“It is often argued that incentives ‘crowd out’ intrinsic motivation,

but we found the opposite,” said Gibbs. “Our view is that this issue is
often misunderstood. Incentives can easily undermine intrinsic
motivation, including creativity, if they reward the wrong outcomes
or behaviors. But if they reward the right ones, they certainly can
reinforce creativity.”

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Younger employees had more ideas than older ones (after controlling
for things like tenure), but tenure was positively correlated with the
quality. The authors hypothesized two potential effects: those with
longer tenure went for “low hanging fruit” while new employees took
a more experimental and fresh approach; or longer tenure meant a
greater understanding of clients’ strategies and business needs,
leading to better ideas. Gibbs said the latter was more consistent with
their findings. And although higher level employees generally had
higher quality ideas, this effect topped off at the highest managerial
ranks. Among executives, whose work is less client-focused, there
were fewer ideas and they had less financial impact.

Interestingly, ideas with more authors were more likely to be shared

with a client and accepted for implementation, reinforcing the
research on the benefits of working in groups (as long as they’re not
dumb). And the authors also found that once the experiment was
over, people still continued to participate and suggest higher quality
ideas, reflecting a “habituation” effect that could be explained by
raised awareness of the Portal or perhaps a change in how people
thought about innovation.

The paper’s main takeaway is that financial rewards can get

employees to innovate, and can possibly fuel a more innovative
culture. But if you want ideas that bring actual value to your
company, and don’t want to be inundated with a bunch of mediocre
ones, tailor the rewards so employees know what to reach for. As for
the company in the study, the authors said that after reading their
analysis, it rolled out the incentives program to the entire
organization.

A version of this article appeared in the May 2015 issue of the Harvard
Business Review.

A version of this article appeared in the May 2015 issue of Harvard Business

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Review.

Nicole Torres is a former senior editor at Harvard

Business Review.

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