Whilst in this 4th industrial revolution, one would imagine innovation would be top of the agenda for most companies, yet a recent study from Harvard Business School revealed that this couldn’t be further from the truth.  It found that just 30% of the 5,000 or so executives the researchers quizzed put innovation in their top three concerns. The survey also revealed that just 21% believe technology trends was a pressing concern as well, leaving the two metrics ranked just 5th and 7th respectively.

So how can this change so that innovation becomes a higher priority for executives?  The answer may come from a recent study from Bocconi University in Milan, which explored the way pay influences how executives think about innovative behaviors such as knowledge sharing and cooperation.

They propose that when executive pay is linked to the individual performance of the executive, it encourages these innovative behaviors, whereas if it’s fixed and not linked to performance, it triggers a process of social comparison that not only demotivates the executive but hampers innovation.

Supporting innovation

Studies into the effect of executive pay have often focused on ethics and corporate performance, with this paper one of the first to explore its impact on innovation output at a number of American firms over a sustained period from 1992 to 2006.

Patent data was plundered from the US Patent and Trademark Office to gauge the innovative output of companies, with citation of those patents also taken into account.  This was then compared with data on the compensation offered to executives at those companies, based upon data from the Standard&Poor Execucomp database.

Whilst there are obvious concerns about correlation and causation, the authors do believe a robust link exists between the kind of pay executives receive, and the innovative output of their companies.

“Taken together, these findings suggest that firms that want to spur innovation need to carefully design their executives’ compensation by taking into account not just the level of pay but also the relative differences in each component of the pay package,” the researchers conclude.