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Management in Practice

How Do You Encourage Innovation?

While almost all companies exalt innovation rhetorically, many fail to encourage it in practice. Which incentives foster consistent idea generation, collaboration, and problem solving? Experts discuss how to manage, organize, hire, and reward for innovation.

Regular infusions of innovation help companies succeed. But innovation involves risks and failures. Though there’s a potential for a long-term payoff, in the short run, innovation can derail progress on established goals and even increase inefficiencies. Caught between a general nudge to innovate and a P&L measured to the penny, managers have little incentive to allocate time or funding to ideas with no certain payoff. Employees often see it as professionally safer to stick to their daily routines. What should companies do to lower the barriers to innovation?

According to Phil Ventimiglia ’96, chief innovation officer at Georgia State University, they should start by looking at their internal culture and operations. “Ideas are not the problem. There are always great ideas in organizations,” he said. “The problem is that they get squashed or there is no way to implement them because they don’t fit in our typical processes.” Ventimiglia, who also spent decades in the private sector including roles at NCR, Dell, and IBM, joined Ashley Goldsmith, chief human resources officer at Workday Inc., and Robert Mulroy ’91, president and CEO of the biotech firm Merrimack Pharmaceuticals, for an online discussion on October 14, moderated by Florian Ederer, assistant professor of economics at Yale SOM.

“Encouraging innovation is about culture and environment,” Ventimiglia said; Goldsmith pointed to cultures that support risk taking and low-ego problem solving as particularly effective at generating innovation. But culture needs to be built one person at a time. Mulroy said that many companies don’t manage, organize, or hire for innovation. “Innovation needs people who are going to consider breaking the rules,” he said. He added that while academic credentials may be a prerequisite for many jobs, he sees them prioritized to the exclusion of qualities like “challenging convention and assumptions and breaking down barriers, which are the skill sets of good problem solvers.”

Companies that offer easy ways to bring ideas forward create a virtuous cycle where that get more and more input, Goldsmith said: “It will build on itself.” She echoed the importance of finding the right people. “Hiring people who want to work with others, who want to work in teams, who like to collaborate by nature, that really matters a lot,” she said. Combining hiring practices with consistently aligned monetary rewards and feedback from managers will compound the drive to innovate.

Ederer noted that research has shown what kinds of compensation structures encourage bottom-up engagement in innovation. “We know companies that do a lot of innovation tend to have more of a reliance on group compensation, more reliance on long-term incentives, and a lot of reliance on broad-based stock option plans,” he said, asking whether those compensation signals are enough to encourage workers at every level to work collaboratively and beyond silos.

Mulroy’s biotech firm moved away from bonuses when it proved too difficult to track innovation transparently and over a reasonable time frame, he said. Groundbreaking work often takes years and can involve backtracking, creating a misalignment with annual bonuses. Ventimiglia warned that when equity goes only to top executives or bonuses are tied to function areas it can constrict the flow of innovation. On the other hand, he said that broad-based equity can be a way to push people out of silos to proactively cooperate.

Innovation should not be limited to product development, Goldsmith said: “I’m a big fan of innovation at all levels and across all jobs.” She acknowledged that innovation from the accounts payable team is likely to lead to efficiencies rather than revolutionary advancements in the core business, but the fact that everyone in a company is empowered and engaged in innovation has value. She also underscored the importance of nonmonetary recognition, from a simple pat on the back to the bragging rights associated with widely broadcast successes.

The structure of a firm itself can shape workflow and opportunities for the serendipitous collision of ideas, Mulroy said. For some companies, that might mean that a skunkworks division generates new ideas while the production team focuses on flawless execution. But his firm has gotten rid of divisions and holds a quarterly all-company meeting where new ideas are presented. When every employee reflects on whether they have something to present at least four times a year, it builds the creative and problem-solving muscles needed for innovation. Coming out of those meetings, teams form to vet ideas. This rewards input with a thoughtful assessment and provides a path to move the best ideas forward.

Corporate structure should be flexible enough let the originators of an innovation carry it all the way through to market, Ventimiglia said. “They are going to be the most passionate about making it work,” he said. “Too often from an HR perspective or organizational-dynamic perspective, we’re too concerned about keeping people in their current job versus allowing them to roll and flow with an idea or innovation.”