Is Pay for Performance Detrimental to Innovation?

By Florian Ederer, Gustavo Manso. Management Sciences, 2009

331 citations recorded by the source corpus.

Previous research in economics shows that paying the agent based on performance induces the agent to exert more effort thereby enhancing productivity. On the other hand, research in psychology argues that performance-based financial incentives may inhibit creativity and innovation. In a controlled laboratory experiment, we provide evidence that the combination of tolerance for early failure and reward for long-term success is effective in motivating innovation. Subjects under such an incentive scheme explore more and are more likely to discover a novel business strategy than subjects under fixed-wage and standard pay-for-performance incentive schemes. We also find evidence that the threat of termination can undermine incentives for innovation, while golden parachutes can alleviate these innovation-reducing effects. Our results suggest that appropriately designed incentives are useful in motivating creativity and innovation.

Subfields: Economics and Econometrics, General Decision Sciences, Safety Research

View Paper: https://www.semanticscholar.org/paper/4b2f7ad54945316e35ab0395422b93e25797b81f

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Citations in the corpus

How Do Foreign Institutional Investors Enhance Firm Innovation? (2017, neutral): “Incentive schemes that motivate innovation must exhibit substantial tolerance for failure, implying that compensation schemes that are less sensitive to performance can, to some extent, motivate innovation better (Holmstrom (1989), Ederer and Manso (2013)).”
Corporate Innovation Along the Supply Chain (2018, neutral): “…the implications of Manso (2011) includes Azoulay et al. (2011) who explore key differences across funding streams within the academic life science, Ederer and Manso (2013) who conduct a controlled laboratory experiment, Tian and Wang (2014) who show that IPO firms financed by more failure…”
Managerial Risk-Taking Incentive and Firm Innovation: Evidence from FAS 123R (2018, neutral): “Consistent with Manso (2011), Ederer and Manso (2013) document that, in a controlled laboratory setting, the combination of tolerance for early failure and reward for long-term success is effective in motivating innovation.”
Corporate Venture Capital, Value Creation, and Innovation (2014, background): “17 In a controlled laboratory experiment, Ederer and Manso (2013) show that the combination of tolerance for early failure and reward for long-term success (which parallels to a larger degree to the compensation structure enjoyed by CVCs compared to that received by IVCs) is the optimal compensation”
Be nice to your innovators: employee treatment and corporate innovation performance (2016, background): “For example, Edmans (2011) finds that the stock returns of firms that treat their employees more positively exceed the stock returns of firms that do not treat their employees as well.”
Do Antitakeover Provisions Spur Corporate Innovation? A Regression Discontinuity Analysis (2018, neutral): “Recent empirical research testing the implications of Manso (2011) includes Ederer and Manso (2012), who conduct a controlled laboratory experiment; Azoulay, Graff Zivin, and Manso (2011), who exploit key differences across funding streams within the academic life sciences; and Tian and Wang…”
The Impact of Stakeholder Orientation on Innovation: Evidence from a Natural Experiment (2016, background): “…the long run, employees and managers generally prefer to invest in short-term projects, unless provided with long-term incentives, such as long-term compensation (Ederer and Manso 2013, Holthausen et al. 1995, Lerner and Wulf 2007), or funding policies with long-term horizons (Azoulay et al. 2011).”
Managerial challenges of Industry 4.0: an empirically backed research agenda for a nascent field (2018, background): “…from culture, i.e., slightly adapting and simplifying the challenge, scholars could continue previous work on advantageous incentive schemes (Ederer and Manso 2013), project management methods (Levitt 2011), approaches to decision-making (Sarasvathy 2001), leadership actions (Doz and…”
Does the media spotlight burn or spur innovation? (2020, neutral): “firm boundaries (Seru, 2014), stock liquidity (Fang, Tian, and Tice, 2014), financial analysts (He and Tian, 2013), managerial contracts (Ederer and Manso, 2013), product market”
Pilot CEOs and Corporate Innovation (2017, neutral): “Further, through laboratory and field experiments, Glucksberg (1962), Ariely, Gneezy, Loewenstein, and Mazar (2009) and Ederer and Manso (2013) show that performance-contingent financial incentives inhibit creativity.”
The Dark Side of Analyst Coverage: The Case of Innovation (2013, neutral): “3 Recent empirical research providing supporting evidence for the implications of the failure tolerance theory includes Ederer and Manso (2011), who conduct a controlled laboratory experiment, and Azoulay, Graff Zivin, and Manso (2011), who exploit key differences among funding streams within the…”
Does managerial ability facilitate corporate innovative success (2015, neutral): “Consistent with this view, Ederer and Manso (2013) show that standard pay-for-performance contracts stifle innovation.”