Can you pay employees to innovate? Evidence from the Canadian private sector

• DOI: http://doi.org/10.1111/1748-8583.12036
• Date: 01 July 2014
• Published date: 01 July 2014

Can you pay employees to innovate? Evidence

from the Canadian private sector

Bruce Curran, Centre for Industrial Relations and Human Resources, University of

Toronto

Scott Walsworth, Edwards School of Business, University of Saskatchewan

Human Resource Management Journal, Vol 24, no 3, 2014, pages 290–306

Using 7 years of data representing the Canadian private sector, we estimate the effects of the major

components of compensation on a rarely studied form of employee performance: innovation. Although

there are some limitations inherent in the data, our results indicate the complex motivation required for

consistent innovation success. Surprisingly, we find that fixed pay (salary) and individual performance

pay have no effect on innovation, while variable group pay and indirect pay (employee benefits) have a

positive effect. In other words, our results suggest that you can pay employees to innovate, provided that

you select the right compensation incentives.

Contact: Dr Scott Walsworth, Edwards School of Business, University of Saskatchewan,

PotashCorp Centre, 25 Campus Dr., Saskatchewan, Saskatoon S7N 5A7, Canada. Email:

walsworth@edwards.usask.ca

INTRODUCTION

Along line of scholars over the past few decades have stressed the importance of

innovation to organisations. Innovation is thought to be critical to adaptability and

responsiveness in a rapidly changing business environment driven by the knowledge

economy, technology, globalisation and short product life cycles (Manso, 2011; Rosenblatt, 2011).

This increased emphasis on innovation seems to be reflected in the changing composition of

jobs, as Johnson et al. (2005) estimated that 70 per cent of US jobs created since 1998 have a

substantial innovation component. Although the concept of innovation is a complex one,

difficult to define, it has been conceptualised as occurring when workers seek to improve a

product, service or process through experimentation, risk taking and discovery (collectively

also called ‘exploration’ and ‘heuristics’), rather than seeking maximum efficiency through

the application of ‘algorithms’ and the ‘exploitation’ of more certain, proven methods or

technologies (March, 1991; Amabile, 1996). Note that, according to this conceptualisation,

innovation includes process improvements, and not just the more traditional research and

development (R&D) conducted for products. This means that a very broad range of employees

can be involved in innovation. Of course, some occupations will have a more extensive latitude

and mandate to innovate than others (e.g. research scientists and advertising executives versus

janitors and checkout clerks). As well, in conceptualising innovations, it is important to bear in

mind that they can differ in degree. Some innovations are merely ‘incremental’, involving

improvements to existing products or processes, while others are more ‘radical’, involving the

creation of entirely new products or processes (Burgelman et al., 2009).

There are a whole host of factors that impact a firm’s ability and desire to innovate,

including firm strategy, competitor strategy and the macroeconomic environment (Hall et al.,

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doi: 10.1111/1748-8583.12036

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 3, 2014290

© 2014 John Wiley & Sons Ltd.

Please cite this article in press as: Curran, B. and Walsworth, S. (2014) ‘Can you pay employees to innovate? Evidence from the Canadian private

sector’. Human Resource Management Journal 24: 3, 290–306.

2010). A complete review of these factors is outside the scope of this article, but some variables

that have been found to be associated with innovation include ownership by institutional

investors (Aghion et al., 2013), high levels of technology (Dabla-Norris et al., 2012), high levels

of knowledge stock and expensive inputs (Popp, 2002). Additionally, the ages of the firm, its

products and its industry are all thought to have an impact on the innovative activity of a firm.

A relatively new firm, with new products, in a young industry, is expected to innovate more

than an older firm, with older products, in a mature industry. Additionally, the type of

innovation is predicted to change as time goes on. In the short run, a high level of product

innovation is expected. In the medium run, this product innovation decreases while process

innovation increases. In the long run, both product and process innovation tend to decline

(Abernathy and Utterback, 2009).

Although there are many factors influencing a firm’s ability to innovate, our focus is on the

impact of a workplace’s compensation practices on innovation. In other words, we want to

answer a simple question: can you pay employees to innovate? It would seem reasonable to

believe that the answer is yes, on the assumption that compensation incentives may provide

effective motivation for employee innovation. In simplistic terms, one might expect an

employee to be driven to make an innovative breakthrough if he/she knew that he/she would

receive a reward for doing so. However, there is a substantial degree of research at the

individual level suggesting that rewards often decrease performance on creative tasks (one of the

first to identify this problem was Glucksberg, 1962, using Duncker’s now famous candle

problem). One theory explaining this phenomenon is that high performance on complex

creative tasks requires intrinsic motivation, and rewards act as a decrement to this motivation

(Amabile, 1996; Deci et al., 1999). Surprisingly, few studies have been conducted at higher levels

of analysis to see whether workplaces can influence innovation on a broader basis through

compensation practices. Our study is intended to fill this gap.

To investigate, we use a major Canadian data set from the private sector created and

administered by Statistics Canada. At the workplace level, we measure separately the effect of

the following four different components of the compensation system on innovation success:

fixed pay, variable pay rewarding individual performance, variable pay rewarding group

performance and indirect pay (such as employee benefits). Our analysis does not examine how

compensation promotes innovation – that is to say we do not measure the specific mechanism

(e.g. employee motivation), nor do we examine under what conditions compensation is more

effective in promoting innovation, such as whether certain forms of individual variable pay

have greater compensation effects than others. Instead, we feel it necessary to first identify

whether or not there is an overall association between different components of a compensation

system and innovation in a nationally representative data set. This will tell us whether it is

fruitful to examine the relationship between compensation and innovation at a level higher

than the individual. Our focus is exploratory, and we hope to open the door for futureempirical

research employing more specific data and measures.

LITERATURE REVIEW AND THEORY

In the following sections, we will examine the theoretical arguments regarding how the

components of a compensation plan impact innovative behaviour.

Fixed pay

There are at least five arguments as to how high fixed pay might provide a mechanism for

enhanced innovative behaviour on the part of employees. First, a reasonably high fixed pay is

Scott Walsworth and Bruce Curran

HUMAN RESOURCE MANAGEMENT JOURNAL, VOL 24 NO 3, 2014 291

© 2014 John Wiley & Sons Ltd.