How Compensation Models Work Against Innovation

by Jeffrey Phillips

How Compensation Models Work Against InnovationI’ve asked myself, and many other people in the innovation space, why innovation seems to be so beneficial on its face and yet so difficult to accomplish. I can’t think many CEOs who aren’t actively talking about innovation and the need for more innovation in their organization. I can’t think of many people who don’t want to see their firms improve, and most of them are simply chock full of ideas. It feels as if “everyone” wants innovation, yet there must be a strong, subtle restraining force that slows and distracts the innovation focus. Certainly there are the “big” challenges – enough time, enough funding, finding enough resources – but generally those can be overcome, at least on a project by project basis. No, I think something more subtle and more persistent is the barrier. I think that when we strip away all of the other innovation constraints and blockades, we’re going to find a very small but very powerful disincentive to innovate, buried in how we compensate our teams.

At our core, we people are fairly simple animals. We are driven by the things that interest us, amuse us or entertain us. Most of us work to afford to do the other things in life we enjoy. We exchange our labor, our thoughts and insights and our management skills for a paycheck. And, since most of us have pretty good lives based on those paychecks, we begin to forget what it was that inspired us and begin to do what ensures and protects the regular receipt of the paycheck. I’ve said it before that many people (self included) can become creatures of their corporate culture. That means that instead of doing what we know to be “right” in terms of creating something new, introducing new ideas and new products, we first evaluate what is expected in terms of our evaluation and compensation. What will keep us in good feeling and mutual admiration with our co-workers and employers. Gradually over time we become the people we used to sneer at when we had gumption and were ready to overthrow the status quo. Now, we are the keepers of the status quo.

And this fact alone is why more innovation gets done in small, entrepreneurial companies than in large companies. All the other excuses that large firms throw around about innovation really pale in significance to the question of compensation. Most people in most large organizations have a very specific compensation plan, and it is usually tied to predictable profits. If that weren’t enough, most people in large organizations have a good chunk of their savings in the firm’s stock, so it is in their interest to create ever predictable revenue streams to reassure Wall Street on a quarterly basis that the firm is headed in a safe, predictable, profitable direction. If everything that supports and sustains your standard of living and your paycheck is based on sustaining predictability and growing profits slightly year over year, you don’t win many friends by suggesting a radical new innovation effort to distract the organization. Even when you can convince people that innovation is necessary the effort is carefully walled off from the rest of the organization so as not to disturb or disrupt the operations necessary to achieve the annual plan and the whispered earnings.

If we truly want to see more innovation in larger firms, then the first thing these executives will do is change how people are evaluated and compensated. If people are evaluated and compensated based on their innovation contributions as part of their regular compensation program, then we’ll see far more ideas developed and implemented. Jack Welch was famous for saying “Show me a sales person’s timecard and I’ll tell you how she is compensated”. I can say with little concern that the reverse is also true: “Show me a person’s compensation plan and I’ll tell you how interested they are in innovation”.

The reason that compensation is such an insidious barrier to innovation is that we all share it and it’s not polite to talk about. No one wants to focus on compensation since it can be such a headache to revise and restructure, but there’s little doubt it is a serious impediment to innovation. Unlike some of the other barriers that can be overcome – few resources, few dollars, few insights – compensation affects everyone and it is a personal barrier as well as a corporate barrier. It’s hard to rally people round the innovation flag when they are looking over their shoulder wondering about how the innovation work will affect their compensation. Even if we get the other things right – establish a good atmosphere for innovation and identify a charismatic leader, people still carry around the millstone of compensation. The fact we pull people out of their roles or teams for a while on an innovation project doesn’t really solve this problem, because they eventually have to go back to their old home or role, where their innovation work may have simply caused more work for the folks who remained behind, and who weren’t compensated for it.

I honestly believe that if a firm seeks to become more “innovative” over time as a sustainable capability, it will have to address its compensation and evaluation programs to bring them into alignment with the responsibilities and work required for innovation to take root and grow. Any firm can innovate once without changing its compensation programs, but it’s rarely sustainable. It’s also interesting that the people most involved with compensation planning are the people least involved in innovation efforts. A good sign of a sustainable innovation program should be the presence of a senior Talent Manager or HR individual who is working in tandem with executives to build new evaluation and compensation models.

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Jeffrey PhillipsJeffrey Phillips is a senior leader at OVO Innovation. OVO works with large distributed organizations to build innovation teams, processes and capabilities. Jeffrey is the author of “Make us more Innovative”, and innovateonpurpose.blogspot.com.

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  1. Jeffrey,

    You analyse the challenge very effectively.

    For a long time many companies have focused on producing ‘safe and predictable’ revenues. In my experience people in many companies have also wanted to generally maintain the status quo and for their working life to be safe and predictable.

    I think the global downturn/credit crisis has now caused some companies to reflect on the fact that however much they want safeness and predictability – it is not an option anymore. They are realising that somewhere out there may be a new technology/new company/new idea that could destroy their market almost overnight.

    Although some are still kicking and screaming about it, more companies are realising they have to innovate to survive.

    As you point out – if the compensation packages can be aligned with this then the whole experience might become a little less painful for all involved!

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