Post by Sapphire Capital on Aug 14, 2008 1:06:01 GMT 4
Motivating Innovation
Gustavo Manso
MIT Sloan School of Management
July 2007
AFA 2007 Chicago Meetings Paper
Hudson Institute Research Paper No. 08-01
Abstract:
Motivating innovation is an important concern in many incentive problems. For example, managers often claim that it is difficult to motivate their employees to devise innovative ways of doing things. The difficulty arises because innovation is the result of the exploration of untested approaches that are likely to fail, and failure is usually associated with low wages and termination. This paper shows that incentive schemes that motivate exploration are fundamentally different from standard pay-for-performance incentive schemes used to induce effort. The optimal compensation scheme that motivates exploration exhibits substantial tolerance (or even reward) for failure and reward for long-term success. Moreover, even though the principal can terminate the agent, inefficient continuation may be optimal to motivate exploration, since the threat of termination may prevent the agent from exploring new untested approaches. Finally, commitment to a long-term compensation plan and timely feedback on performance are essential ingredients to motivate exploration. The institution of tenure, debtor-friendly bankruptcy laws, and golden parachutes are examples of schemes that protect the agent when failure occurs and thereby encourage exploration.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID891514_code170891.pdf?abstractid=891514&mirid=3
Gustavo Manso
MIT Sloan School of Management
July 2007
AFA 2007 Chicago Meetings Paper
Hudson Institute Research Paper No. 08-01
Abstract:
Motivating innovation is an important concern in many incentive problems. For example, managers often claim that it is difficult to motivate their employees to devise innovative ways of doing things. The difficulty arises because innovation is the result of the exploration of untested approaches that are likely to fail, and failure is usually associated with low wages and termination. This paper shows that incentive schemes that motivate exploration are fundamentally different from standard pay-for-performance incentive schemes used to induce effort. The optimal compensation scheme that motivates exploration exhibits substantial tolerance (or even reward) for failure and reward for long-term success. Moreover, even though the principal can terminate the agent, inefficient continuation may be optimal to motivate exploration, since the threat of termination may prevent the agent from exploring new untested approaches. Finally, commitment to a long-term compensation plan and timely feedback on performance are essential ingredients to motivate exploration. The institution of tenure, debtor-friendly bankruptcy laws, and golden parachutes are examples of schemes that protect the agent when failure occurs and thereby encourage exploration.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID891514_code170891.pdf?abstractid=891514&mirid=3