Is Pay for Performance Detrimental to Innovation?

Florian Ederer and Gustavo Manso ()
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Gustavo Manso: Haas School of Business, University of California, Berkeley, Berkeley, California 94720

Management Science, 2013, vol. 59, issue 7, 1496-1513

Abstract: Previous research in economics shows that compensation based on the pay-for-performance principle is effective in inducing higher levels of effort and productivity. On the other hand, research in psychology argues that performance-based financial incentives inhibit creativity and innovation. How should managerial compensation be structured if the goal is to induce managers to pursue more innovative business strategies? In a controlled laboratory setting, we provide evidence that the combination of tolerance for early failure and reward for long-term success is effective in motivating innovation. Subjects under such an incentive scheme explore more and are more likely to discover a novel business strategy than subjects under fixed-wage and standard pay-for-performance incentive schemes. We also find evidence that the threat of termination can undermine incentives for innovation, whereas golden parachutes can alleviate these innovation-reducing effects. This paper was accepted by David Hsu, entrepreneurship and innovation.

Keywords: organizational studies; motivation incentives; personnel; research and development; innovation (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (218)

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http://dx.doi.org/10.1287/mnsc.1120.1683 (application/pdf)

Related works:
Working Paper: Is Pay-For-Performance Detrimental to Innovation? (2009)
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