The following is an excerpt from Relentless Innovation: What Works, What Doesn’t–and What That Means for Your Business by Jeffrey Phillips.
Compensation in many organizations is driven by three factors: the salary bands or grades that an employee is assigned to, the outcomes of the business as a whole, and the evaluation of the employee’s work in the previous year. People want to do work that engages their interests and passions, but they must work to optimize their compensation. While their hearts may be aligned to innovation activities, they minds and wallets are focused on how they’ll eventually be evaluated and compensated. This means that the operating model must introduce new evaluation metrics, incorporating more weight on innovation activities and leading to a balanced outcome for compensation, advancement, and promotion.
Humans are rational actors who seek to undertake work resulting in rewards and avoiding actions that lead to reprimands. In large firms, human resource teams spend countless hours developing evaluation and compensation schemes meant to ensure that employees are adequately and fairly compensated for their work, while being encouraged and rewarded for activities aligned to the success of the business. Due to the strong evaluation and compensation programs in place in many businesses, and the overriding focus on efficiency and effectiveness, innovation is difficult to sustain–innovators are often assigned to an innovation role on a part-time basis but their compensation and advancement remains tied solely to the evaluations of the work they accomplish on their “day jobs.” When push comes to shove, employees’ focus, attention, and effort will revert to their regular duties.
Therefore, to sustain an innovation focus in a business, organizations must change their evaluation and compensation structures. Few, if any, organizations have well-defined criteria to evaluate work associated with innovation. Since compensation is highly correlated to evaluation results, if the evaluation program doesn’t measure or recognize innovation efforts, there will be little additional compensation for innovation activities, encouraging employees to focus on business as usual over innovation. If the compensation plan rewards business as usual and snubs or omits rewards or compensation for innovation, why should any manager focus on innovation over business as usual.
OVO’s banking client went further than just requiring innovation projects in the annual plan–they now link innovation projects to the evaluation and compensation for senior executives in their business lines. Executives have an added incentive to be innovative–their evaluations, promotions, and compensation are directly impacted by their innovation efforts. There’s an obvious importance in innovation for these executives, when clarity about compensation is often lacking for many potential innovators. Google, as another example, offers innovators a stake in the rewards of the ideas that are converted into products or services, so the individuals see a direct result of their efforts in their paychecks or stock awards.
Rather than allow compensation to dissuade strong individuals from innovation work, the new innovation BAU (business as usual) operating model demands compensation schemes that encourage and reward people who innovate. Both the compensation and evaluation schemes must demonstrate that a focus on innovation will be rewarded.
Compensation programs almost must account for the fact that there are different roles in an innovation effort. A few new full-time roles may be created to support innovation, while many individuals in the organization may be called on to participate on a part-time basis as idea generators, evaluators, or subject matter experts. These innovation activities need to receive as much “weight” in the evaluation and compensation program as other tasks that sustain business as usual. Further, gaining new experience that supports innovation, whether through classroom training or actively participating in an innovation effort, must be recognized and rewarded as well.