How Financial Incentives can Encourage Creative Ideas and Innovation

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How Financial Incentives can Encourage Creative Ideas and Innovation
Anneke Zwart, Moderator
Research has often suggested that external, financial rewards do not work well in terms of developing creative ideas and innovations. Offering them may even undermine intrinsic motivation.
However, according to Gibs, Neckermann and Siemroth (2014) financial rewards CAN work. Even for innovation and for generating creative ideas. Whether or not it fosters performance depends on the circumstances under which the financial rewards are given. So, what are these circumstances under which financial rewards can be beneficial for companies?
A research among among 19 teams in Asian IT services company awarded so-called structured incentives: awarding points for a creative idea or innovation, with the opportunity to obtain more points depending on the quality of the idea (assessed by clients rating the ideas). Although the number of ideas handed in per employee decreased, the structured incentives did increase the quality of the ideas handed in. Thus, structured incentives CAN spur innovation, specifically through increasing the quality of innovative and creative ideas.

The main point is that whether or not rewards spur innovations depends on what behaviors/outcomes are actually rewarded. Incentives can spur innovative and creative ideas if they reward the right behaviors or outcomes. They will undermine it if the wrong behaviors/outcomes are rewarded. In order to successfully implement financial incentives, organizations need to critically think about what specific type of behavior and outcomes are desired and which type of rewards spurs those specific desired behaviors/outcomes.
Source: Gibs, M, Neckermann, S. and C. Siemroth (2014) “A Field Experiment in Motivating Employee Ideas” SSRN

How Non-Financial Incentives Trigger Innovative Behavior
Of course, non-financial reward mechanisms like awarding responsibility, recognition and job satisfaction do matter a lot in spurring sustainable innovative behaviors. See how Dan Pink's video explores the negative effects of financial incentives on performance.



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