Financial incentives can trigger increased effort when you need your employees to deliver results. However, when you need them to be innovative and create new things, these rewards based on success are not always an effective way to motivate employees.
Many managers struggle for balance. First, they need short-term results and efficiency and second they need innovation and to discover new possibilities. Basically, all companies are exploring new and untested territory and trying to exploit what knowledge and capabilities are currently available in the most effective way possible.
The two key objectives of every company must be separated
According to an article published on the knowledge.insead.edu, it is necessary to separate exploration and exploitation on an organizational level. Separate units should have certain set periods of time when their main interest is to be innovative and other periods when their key interest is to make the current state more efficient.
Do you want innovation? Change your compensation scheme
How can you motivate people in order to fulfill both of these strategic objectives? It can be tricky. The main issue is that the objective of innovative solutions is much more unpredictable and uncertain. When money is used as a motivator, creativity can be stifled. It urges people to exploit currently available means to ensure fast payoffs. People will seek fast successes while long-term exploratory activities will be put aside.
Research conducted by the business school INSEAD titled How Performance Incentives Shape Individual Exploration and Exploitation: Evidence from Micro-data suggests that salesmen would explore new commercial ideas more if the policy of performance incentives was abandoned. Sales representatives and executives from a South Korean e-commerce company participated in the study. In the next article, we will examine what happened when the compensation scheme based on incentives was restructured.
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