Risk vs. Reward – How Compensation, Career Path, and Employment Stability Drive Innovation

For the better part of the last decade I had focused my career on driving innovation for Best Buy, a Fortune 100 retailer, and the undeniable king in the consumer electronics category.  When I joined the company I was focused on identifying innovative products and services that were specifically tailored for the needs of their newly identified customer segments.  I then joined a team where we focused on creating new concept and prototype stores and lead the team responsible for the Escape concept store in Chicago.  Eventually we shut down our two concept stores and I worked to reshape the team into an internal capability that could deliver new prototype stores (i.e. Best Buy Mobile), new retail models (i.e. Best Buy Express), and identify new growth product and service categories (i.e. Personal Transportation, Home Energy Management, and Health & Fitness).

Throughout all of this work and in my discussions with innovation leaders from other companies I would continually see the same problem recurring over and over again.

The Risk vs. Reward model was out of whack
for those who wanted to spend their careers driving innovation.

The risks involved for those intrapreneurs who were willing to go beyond Incremental Innovation and attempt Exponential Innovation would include: 1) compensation shortcomings, 2) career path challenges, and 3) employment uncertainty.

Compensation: In most mature organizations base compensation is determined by years of service with a comparison of the role across companies in the industry.  Bonuses are usually calculated by how far a group is able to exceed their budgets but is based on how much revenue or profit they drive.  Neither of these measures creates an easy comparison between core business roles and innovation roles.  When working on early innovation initiatives it is almost impossible for leaders to determine “accurate” growth targets and thus it is equally difficult for the team to exceed those projections with any accuracy.

Career Path: In most mature organizations there is a logical career path for core business roles.  Not everyone follows the same path but there in a natural progression through the company.  What most organizations have not figured out is how to recognize an individual’s service within the innovation space.  For many companies it is almost like taking a “leave of absence” from the organization and does not count toward an individual’s measure for career advancement.  If you add in the higher probability of “failure” with this innovation work, it might be worse than standing still. It might equate to moving backwards from a career perspective.

Employment Stability: One of the things that I learned early on with innovation work was that it was truly considered R&D.  On multiple occasions I have seen a part, or all, of the “innovation” team blown up with team members scrambling to figure out if they were going to have a position within the company going forward.  Like any type of R&D, everything done within the innovation space is classified as a sunk cost and the organization may or may not see any productive gains out of that work.  There may be success stories yet to be discovered in this work but will require more capital and more time.  But if a company needs to make a quick cut to their expenses the R&D budget is usually an easy target and it does not impact immediate operations.

Until leaders can address these issues the Risk vs. Reward model will remain out of whack and will prevent employees from fully engaging in driving high potential innovation within their organizations.

I was recently asked to write an article for the Society for Human Resource Management (SHRM.com) on what can organizations do to create an environment that inspires innovation and a higher degree of employee risk taking.  In the article I note how many companies today are risk adverse and rely on compensation models and incentives that only support the status quo, instead of encouraging employees to step out of their box and step up to achieve ambitious goals.  I encourage companies of all shapes and sizes to make a thorough analysis of their organization’s tolerance of risk through their compensation, career path, and employment models.  I finish by providing a simple framework with suggestions that leaders can use to rebalance the Risk vs. Reward equation in their organizations.

Here is a reprint of the entire article from SHRM.com:

Use Compensation to Inspire Innovation – 12/26/2012

Innovation drives business and productivity. Those organizations that consistently challenge themselves and their employees become market leaders. However, many companies are risk adverse, relying on compensation models and incentive programs that support the status quo instead of encouraging employees to achieve ambitious goals.

Incremental Innovation

One reason companies may shy away from propelling creativity is the lack of a balance sheet that’s strong enough to support innovation—and withstand the risk that some new initiatives might not succeed. This does not mean those companies need to discourage all risk. They can benefit by focusing on “incremental innovation.”

When a company focuses on incremental innovation, the need to change the entire structure of the organization is minimized. For instance, the company can:

  • Continue with its current operational structure, but add a modest rewards program that incentivizes individuals or teams to promote innovation within their own domains.
  • Creative teams can drive quicker results by focusing on incremental goals, such as product line extension opportunities and operational efficiency improvements.

Exponential Innovation

If an organization has the resources and corporate culture to support organization-transforming “exponential innovation,” greater short-term risk is involved—with the prospect of greater success in the future. The structure and compensation models for such risk need to be aligned. Possible issues with this restructuring include:

  • If innovation teams reside in the same entity as core business teams, then it may be difficult to differentiate their compensation packages within the same pay grades. Jealousy and inconsistency can stymie motivation quickly. Expansion of pay ranges by pay grade level could be a possible solution.
  • If separate entities are created to house innovation teams, it could prove more difficult to transfer resources between the core business and innovation sectors. Again, animosity between the groups needs to be avoided through fair pay and effective communication.

Creating a Compensation Model for Innovation

A compensation model that encourages innovation should strike a balance between the risks and rewards associated with the work. Entrepreneurs and initial investors who launch a new company take on the risk of losing their wealth. If the venture succeeds, they are rewarded for that risk handsomely. In a mature organization, employees might not be taking a risk with their own savings, but they are risking future compensation and, possibly, career stability. Effective strategies to reduce this risk include:

  • Create a safety net by implementing a structure for employees to move from high-risk innovation projects back to the core business. This removes risk from the innovation work and can be a great alternative if employees’ original innovation projects were cancelled or shut down. It encourages them to take on high-risk initiatives they might have avoided otherwise.
  • Reward risk-taking through bonuses, titles and in-house perks. In a perfect world, taking on risks would not affect a career negatively.. However, very few executives rise to become CEOs based on their failures. Risk-taking can lead to failure regarding any specific new initiative, but fostering a culture of continual innovation lays the groundwork for long-term success, and those who support that effort should be rewarded.
  • Create rewards programs that recognize innovation within all elements of a company.  A culture of innovation needs every employee to contribute from within their own function. Human resources, finance and marketing are all critical support centers to drive innovation forward.

With a thorough analysis of an organization’s tolerance for risk, current compensation models and, ultimately, desire for innovation, a new framework can be established that provides appropriate incentives to fuel new ideas.

This entry was posted in BlogPosts and tagged , , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>