Incentive Contracts and Employee-Initiated Innovation: Evidence from the Field

53 Pages Posted: 17 Aug 2018 Last revised: 8 Dec 2018

See all articles by Wei Cai

Wei Cai

Columbia Business School

Susanna Gallani

Harvard Business School

Jee-Eun Shin

University of Toronto - Rotman School of Management

Date Written: December 7, 2018

Abstract

Organizations often empower employees at all levels to propose innovation ideas that rely on their first-hand knowledge of their standard task (i.e. employee-initiated innovation). Many, however, struggle with motivating employees to develop innovative ideas that may benefit the firm, especially when the standard tasks for which employees are hired, measured and incentivized do not explicitly include innovation. Prior analytical research posits that low-powered incentives can motivate employees to pursue innovation opportunities by reducing the pressure to deliver on performance measures associated with their standard tasks included in the incentive contract. Using data from a Chinese manufacturing company where employment contracts for standard tasks exhibit significant variation in terms of composition of fixed and variable components of pay, we examine whether the structure of incentive contracts for the standard tasks influences employees’ propensity to engage in innovation activities. We find that employees under fixed-pay contracts are more likely to engage in innovation ideas benefiting the firm relative to employees under variable-pay contracts. Moreover, such efforts are concentrated on innovation ideas that are not specific to the standard task performed by the proposing employee, but are applicable to issues of greater breadth for the firm and/or with a long term view. We perform a battery of additional tests to rule out endogeneity concerns, to validate the robustness of our findings, and to examine the impact of contract structure on important organizational outcomes. Our results contribute to the literature on the effectiveness of using low-powered incentives to encourage unplanned employee-initiated innovation activities that are difficult to contract upon ex ante.

Keywords: employee-initiated innovation, contract design, creativity, low-powered incentives

JEL Classification: M41, M52, M54, M55

Suggested Citation

Cai, Wei and Gallani, Susanna and Shin, Jee-Eun, Incentive Contracts and Employee-Initiated Innovation: Evidence from the Field (December 7, 2018). AAA 2019 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=3233613 or http://dx.doi.org/10.2139/ssrn.3233613

Wei Cai

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Susanna Gallani (Contact Author)

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States

Jee-Eun Shin

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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