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For many executives, it seems to make intuitive sense: If you reward employees financially for contributing their ideas, they will contribute more of them, right? Not in many cases, according to Alan Robinson and Dean Schroeder, authors of the new book, Ideas Are Free. They devote an entire chapter to this topic, the first time I have seen it covered in a book on innovation. Here are some of the ways that idea reward systems can go wrong, according to the authors.

For many executives, it seems to make intuitive sense: If you reward employees financially for contributing their ideas, they will contribute more of them, right?  Not in many cases, according to Alan Robinson and Dean Schroeder, authors of the new book, Ideas Are Free. They devote an entire chapter to this topic, the first time I have seen it covered in a book on innovation. Here are some of the ways that idea reward systems can go wrong, according to the authors:

The problem of accurate measurement: For many ideas, it is all but impossible to accurately measure their value. “Worse, since the calculated savings would be both an approximation and a projection, they would be open to dispute… When money is at stake, these disputes can get quite contentious and cause considerable ill feeling and distrust.”

Rewards cause idea myopia: Employees will tend to focus on ideas that promise an immediate payoff, while ignoring other, possibly more significant, long-term opportunities. “Because only the ideas with readily documentable savings or revenue earn rewards, employees soon become conditioned to look exclusively for ideas like this. At the same time that they are being exhorted to ‘think outside the box,’ they are being boxed in by rewards that focus them on a very narrow set of problems and opportunities.”

The problem of fairness: Many corporate idea programs only reward the person who initially submitted an idea. But most ideas are not submitted fully formed and ready for implementation, according to the authors. “An idea is only a possibility — a small beginning that must be nurtured, developed, engineered, tinkered with, championed, tested, implemented and checked… Many people could be involved in making the idea happen. In practice, however, it is too difficult and divisive to offer rewards to people other than those who conceived the idea… This can be very unfair.”

Reward programs may tempt managers to behave badly: According to the authors, the potentially large sums of money involved in some corporate idea reward programs can lead to an ethical behavior and even fraud. They cite several examples where managers have resisted paying out large rewards because of budgetary concerns; have bribed their direct reports for a cut of the reward in return for approving an idea for implementation, and a manager who first sabotaged a department’s performance and then appeared to ‘improve’ it with a series of simple, well-planned ideas, calculated to give him a major payoff.

Reward programs can create unnecessary overhead: Most idea reward systems require “an evaluation process to estimate projected savings from each idea, an arbitration process to settle disputes over these calculations, and an audit process to make sure that the reported savings are accurate.” This can create a significant amount of non-value adding work for an organization.

For best results, the authors recommend that if an organization must offer rewards, the program should have three attributes:

  1. It should base the rewards on simple aggregate measurements: For example, all employees who contribute at least two ideas in the last calendar quarter will receive a bonus based on a gain-sharing program. If employees’ ideas improve the company’s performance, everyone benefits.
  2. It should distribute the rewards equitably to all employees using a fair and transparent method.
  3. It should be integrated as much as possible into how the company already works – into its existing culture and values.

Robinson and Schroeder emphasize that companies don’t have to offer rewards to their employees to get their best ideas: “An organization can get all the ideas it wants without offering rewards. Many people already have lots of ideas, want to share them and would be thrilled to see them used. They feel pride in their work and like to contribute to their organizations’ success. For them, the best reward is to see their ideas used.”

Listen to this podcast to find out what roles curiosity and humility play in innovation.