Economists and business leaders agree that innovation is a crucial driver of economic growth, but they disagree on the best method to encourage people to generate “think-out-of-the-box” ideas that result in newer and better products and services. According to new research from the University of California, San Diego, competitive “winner-take-all” pay structures are most effective in stimulating the creative juices that power economic growth.
The conclusions are based on a study written by economics professor Joshua Graff Zivin and management assistant Elizabeth Lyons, who collaborated with Thermo Fisher Scientific, one of the world’s top biotech corporations, to create a contest for the Baja California office. Participants in the competition, which was open to all non-management workers of Thermo Fisher and other tech businesses in the region, were challenged to create digital solutions to enable tiny healthcare clinics in the region exchange medical equipment.
The challenge was designed to see which of two standard compensation models generated the most unique ideas. Those who signed up were chosen at random to compete in either the “winner-takes-all” category, in which one prize of $15,000 was granted to the first place finisher, or the “top 10” category, in which the same amount of prize money was distributed among the top ten submissions.
Participants in the winner-takes-all compensation scheme submitted proposals that were significantly more novel than their counterparts in the other scheme. While the two groups’ aggregate results did not differ statistically, the risk-taking encouraged by the competition with a single prize resulted in inventors seeking more imaginative ideas.
Professor Joshua Graff Zivin
“Participants in the winner-takes-all compensation scheme submitted proposals that were significantly more novel than their counterparts in the other scheme,” wrote the authors of a working paper published by the National Bureau of Economic Research (NBER), who are both affiliated with the UC San Diego School of Global Policy and Strategy. “While the two groups’ aggregate results did not differ statistically, the risk-taking encouraged by the competition with a single prize resulted in inventors seeking more imaginative ideas.”
They continued, “These findings are crucial because the economy of the twenty-first century values novelty. Firms see it as a significant source of competitive advantage. It is also a necessary component in the development of technology innovations that revolutionize markets and have a significant impact on consumers and producers.”
How firms can produce more creative ideas with a limited amount of resources
Most modern-day techniques aimed to ignite innovation by chief technology officers (CTOs) and management gurus rely on performance-based pay and are based on assumptions about employees’ abilities and ambitions, as well as their risk choices. The NBER paper’s findings, on the other hand, reveal that with identical groups of innovators, corporations can enhance employee inventive output simply by modifying how they compensate them.
“Those competing for a single large prize had to push their achievements even further in order to be innovative; nonetheless, what is most unexpected is that this is a pretty low-cost option for corporations to induce more radical innovation,” Lyons remarked.
Though the “winner-takes-all” category had more risk vs. reward, both produced roughly the same number of submissions (20 in the “top 10” category and 22 in the “winner-takes-all” category), indicating that having a lower chance of winning a monitory award had no effect on the amount of work output.
A panel of six professionals judged the submissions. Half of the judges were from industry (Thermo Fisher Scientific and Teradata), while the other half came from academics (computer sciences professors from local universities in the Baja California region).
The submissions’ uniqueness was graded on a scale of one to five in comparison to what is already and/or soon to be available on the market. The lowest possible score was one for proposed solutions that were already on the market, and the maximum possible score was five for submissions in which no one else had thought of a similar idea.
Those who participated could work as individuals or in groups. The results of team vs. individual entries in both categories are consistent with prior studies, which suggest that teams with diverse skill sets and deepened professional experience produced stronger entries than individuals. The team entries in the “winner-takes-all” category, on the other hand, were more creative than the group work in the “top 10” category.
Following that, members in both categories were polled on their risk preferences. Unsurprisingly, individuals who were less afraid of taking risks fared better in the “winner-takes-all” category.
The results also revealed that women who entered the contest did higher than the average in both competition categories. Finally, the writers stated that incentives do not create genius, but rather empower it.
“It is critical to acknowledge that rewards alone are insufficient to promote creativity,” they stated. “More research is needed to comprehend the underlying materials that shape the link between creativity and remuneration.”
