Motivating Innovation

72 Pages Posted: 21 Mar 2006 Last revised: 25 Oct 2014

See all articles by Gustavo Manso

Gustavo Manso

University of California, Berkeley - Haas School of Business

Date Written: November 26, 2010


Motivating innovation is an important concern in many incentive problems. For example, shareholders of large corporations often need to motivate managers to pursue more innovative business strategies. This paper shows that the optimal incentive scheme that motivates innovation exhibits substantial tolerance (or even reward) for early failure and reward for long-term success. Moreover, commitment to a long-term compensation plan, job security, and timely feedback on performance are also essential ingredients to motivate innovation. In the context of managerial compensation, the optimal incentive scheme that motivates innovation can be implemented via a combination of stock options with long vesting periods, option repricing, golden parachutes, and managerial entrenchment.

Keywords: Incentives, innovation, exploration and exploitation, learning

JEL Classification: D83, G32, G34, M13, M52, M54

Suggested Citation

Manso, Gustavo, Motivating Innovation (November 26, 2010). Journal of Finance, vol. 66, pp. 1823-1869, 2011; AFA 2007 Chicago Meetings Paper. Available at SSRN: or

Gustavo Manso (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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