Given the importance of innovation to many companies, the optimal performance of Research & Development employees can be critical to business success. While past research indicates that there is a strong link between monetary rewards and employee performance, this relationship is less clear when it comes to generating employee innovation. A multi-year study in Japan assessed the effect of rewards on the innovation outcomes of Research & Development employees. The study found that, while the relationship differed depending on company size, generally financial reward had a negative impact on employee innovation.
Key Topics: Innovation; Pay-for-performance; Extrinsic reward; R&D employees
Title of Reviewed Article: Does an extrinsic reward for R&D employees enhance innovation outcomes? Evidence from a Japanese innovation survey
Researchers: Daisuke Kanama (Tokyo University of Agriculture) and Kohei Nishikawa (Setsunan University).
Publication: R&D Management, 2017, Vol. 47 No. 2, pp. 198–211.
Setting the Scene
The research relating to effectiveness of financial rewards in generating greater innovation from Research & Development (R&D) employees has been inconclusive. While some studies have indicated that there are innovation performance gains (e.g. Onishi, 2013; Lerner & Wulf, 2007), these studies have often assessed innovation performance based on the number of generated new patents, which others have questioned given that it is not a measure of innovation performance that many companies use, with performance measures such as technological superiority and profitability also prevalent.
Furthermore, some have argued that offering financial rewards for innovation can lead to a decrease in collaboration, which is often a necessary component for innovation to thrive (Pfeffer & Langton, 1993). While studies have also indicated that workers tasked with innovative and creative performance are often more motivated by non-financial rewards, such as engaging in challenging work (Owan & Nagaoka, 2011).
In contrast to previous studies, the current study assesses the effects of financial rewards for R&D employees on company level innovation outcomes, namely, the development of new
products and services as well as the technological superiority and profitability brought on by these new products and services.
How the research was conducted
Data for this study was collected primarily from the Japanese Innovation Survey 2009 (J-NIS2009), which was conducted by the National Institute of Science and Technology Policy (NISTEP) in Japan. This survey collected Japanese company level data relating to innovation activities from 2006 to 2008.
4,579 companies participated in the survey. This study focuses on analysing 942 of these companies, which were in the manufacturing industry and engaged in internal R&D activities. Companies were then further classified as High-technology, Medium-high-technology, Medium-low-technology, Low-technology, High-tech service and Other service.
The survey asked two questions relating to extrinsic reward systems A) “Have you introduced a compensation system for inventions?” and (B) “Do you reflect the results of R&D activities in the evaluation of R&D employees?”
Based on data from the J-NIS2009, three types of innovative achievements were assessed, namely, A) New product or service development and their introduction to market, B) Creation of technological superiority through products or services, C) Profitability relating to new products or services.
The researchers controlled for a number of variables that might affect the introduction of new products or services, which included sales volume, the ratio of internal R&D expenditures to sales, reliance on external knowledge, level of protection (e.g. patenting) and industry factors.
Key Research Findings
Companies that had introduced performance evaluation systems based on R&D performance were found to be more likely to develop new products and services. The introduction of such evaluation systems was found to create innovation with greater technological superiority than in companies that introduced a compensation system.
The introduction of financial rewards for innovation was found to have no significant effect on innovation performance in small and medium-sized companies, while there was a negative impact in large companies on the development of new products and services, as well as on technological superiority.
Level of protection, the degree of access to external knowledge sources, the diversity of external knowledge sources accessed by companies, and market competitiveness were all found to have a positive effect on the development of new products and services.
The results of this study suggest that employee performance evaluation systems based on R&D performance have a greater positive effect on R&D performance than financial reward based performance systems for innovation, leading to the development of more new products and services with greater technological superiority. These results are consistent with the contention put forward in prior research that R&D employees place less value on financial incentives than on the development of meaningful new products and services (Owan & Nagaoka, 2011).
Interestingly, while the introduction of innovation related financial reward in small and medium-sized companies was found to have no significant effect on the development of new products and services and on technological superiority, in large companies negative effects were produced by the introduction of financial reward. This finding is consistent with the idea that employees in large companies may see the introduction of financial rewards as counter to engendering optimal innovation and lose motivation (Pfeffer & Langton, 1993), while seeing performance evaluation as conducive to producing innovation.
Organizational and Reward Implications
Performance based compensation systems are prevalent in many companies, particularly in large companies, who see it as a means to drive greater employee performance. This study warns against the use of such an approach for all employees, and that treating the motivation profiles of all employees as homogenous can in fact lead to performance decline. While pay for performance is undoubtedly central to the performance of many employee groups, this study encourages against companies using a one size fits all approach to performance and reward management.
In the case of this study, it is R&D employees who are examined and the results demonstrate that a pay for performance approach is ineffective in generating innovation. The finding that performance evaluation is more motivating for such creative employees is something that companies should take heed of. As this study shows, such evaluations can increase performance but can also come at a fraction of the cost of pay for performance systems.
This study provides evidence against the wisdom of the trend towards greater pay for performance, and highlights that financial rewards may not be the answer to every performance situation. However, given that the focus of this study is on comparing performance evaluation and financial reward for performance, it would be beneficial for future studies to examine situations where both are offered or team performance is rewarded financially.
Source Article: Kanama, D., & Nishikawa, K. (2017). Does an extrinsic reward for R&D employees enhance innovation outcomes? Evidence from a Japanese innovation survey. R&D Management, 47(2), 198–211.
Published by: John Wiley & Sons Ltd
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Lerner, J., & Wulf, J. (2007). Innovation and incentives: evidence from corporate R&D. The Review of Economics and Statistics, 89(4), 634–644.
Onishi, K. (2013). The effects of compensation plans for employee inventions on R&D productivity: new evidence from Japanese panel data. Research Policy, 42(2), 367–378.
Owan, H., & Nagaoka, S. (2011). Intrinsic and extrinsic motivations of inventors. Discussion papers 11022, Research Institute of Economy, Trade and Industry (RIETI).
Pfeffer, J., & Langton, N. (1993). The effect of wage dispersion on satisfaction, productivity, and working collaboratively: evidence from college and university faculty. Administrative Science Quarterly, 38(3), 382–407.