When it comes to driving innovation at your organization, it pays to have the right incentives, such as recognition and cash compensation.
Harvard Professor Josh Lerner says incentives help shape employees’ behaviour.
“Without rewards, good ideas languish unused, and researchers end up pursuing blind alleys,” he says.
For the Tangerine Lecture in Finance in Toronto on September 13, Lerner, the professor of investment banking who leads Harvard’s Entrepreneurial Management Unit, discussed why and how companies should foster innovation through incentives. Here are a few key takeaways:
Innovation doesn’t come cheap
Lerner said many firms today are disillusioned with corporate research due to the challenges that come with managing complex portfolios of research projects. As a result, they have cut corporate spending on basic research or restructured the way their research laboratories work. This approach can set them up to fail at innovation.
Likewise, firms might resist compensating their innovators because those innovators are commercializing technologies that belong to the company. But it takes a long time to make a promising technology a viable product and Lerner said a firm’s innovators need to share in the upside.
The environment matters
It’s not just enough to throw money at innovation, firms also need to create a good work environment for innovators. Incentive programs that focus on recognition, specific goals, and long-term thinking are ideal.
A hybrid model works best
In the last half-century, there have been two dominant models for encouraging innovation: the traditional corporate research lab and venture-backed startups. Lerner said they both have shortcomings. Firms with research labs often concentrate their funding on what has worked in the past, rather than thinking about future needs. And while venture-backed startups are future-focused, they might be too dependent on quick returns.
“The sweet spot is a hybrid between the systems,” he said. “That way the powerful motivations and focused goals associated with venture capital can be preserved, while the limitations that circumscribe the effectiveness of this intermediary can be overcome.”
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The Tangerine Lecture in Finance series, sponsored by Tangerine Bank, aims to highlight thought-provoking and practical information about the world of finance. It is organized each year by the Tangerine Chair at Ivey, currently Associate Finance Professor Michael King.
