Rich Incentives for Innovation Yield a Flood of Mediocre Ideas

Offering employees equity stakes and other lucrative incentives to spur innovation raises their output of mediocre ideas but does nothing to stimulate real breakthroughs, which are stubbornly rare, say Oliver Baumann of the University of Southern Denmark and Nils Stieglitz of the Frankfurt School of Finance and Management in Germany. For example, a policy increasing employees’ share of innovations’ profit from 10% to 90% would more than double the flow of incremental suggestions, creating a torrent of mostly unusable ideas, while the number of radical innovations would rise by virtually zero. Companies would do better to offer low-powered incentives for innovation, the researchers say.