Best way to encourage innovation?

Research from the University of California San Diego indicates that competitive “winner-takes-all” pay structures are most effective in getting the creative juices flowing that help fuel economic growth.

“Participants under the winner-takes-all compensation scheme submitted proposals that were significantly more novel than their counterparts in the other scheme,” said the authors of National Bureau of Economic Research (NBER) working paper, who both hold appointments with the UC San Diego School of Global Policy and Strategy. “While the two groups did not statistically differ from one another on their overall scores, the risk taking encouraged by the competition with a single prize resulted in innovators pursuing more creative solutions.”

creating ideas with a limited amount of resources

Mechanism to spark innovation often rely on performance-based-pay and hinge on assumptions regarding the ability and ambitions of employees and their risk preferences.

Those competing for one big prize had to push further in making their results creative however what is most surprising is that this is a relatively low-cost way for companies to induce more radical innovation.

In conclusion, it was noted that genius is not created by incentives, but empowered by them.

It is important to recognize that incentives alone are insufficient to spark creativity. More work is required to understand the raw ingredients that shape the relationship between creativity and compensation.

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