KPIs and Employee Incentives to Encourage Corporate Innovation
I left the corporate world years ago not only because I managed to raise funding to pursue my own startup ideabut mostly because there was little to no incentive for managers to encourage new ideas or change.
Managers were simply incentivised to deliver simply what was in their position description and more often than not, that had nothing to do with discovering new ways of doing things, much like the organisations they work for.
Change is risky after all, or so they say.
Many managers wonder why on earth they should take a risk on change when they’re sitting pretty on a six figure salary, probably have mouths to feed, are comfortable with “the way things have always been done around here” rhetoric and have no real desire to rock the boat.
But with more than 50% of today’s S&P500 facing replacement in the next 10 years alone and with one in three listed companies at risk of being de-listed in the next five years, it’s no secret that organisations need to start incentivising innovation if top-down calls from senior executives to “be bold, be innovative!” are to be heeded. This need is even more pronounced at a middle manager level which can either be the lifeblood or ring the death knell of corporate innovation.
The question often becomes one of how to incentivise innovation without compromising the core business model. After all, the core business model is where we make money today (but not necessarily tomorrow — just ask Kodak, Blockbuster, Borders, Compaq and countless others who have fallen by the wayside thanks to technology and/or business model disruption).
The following post should serve as a guide as to how you might go about incentivising innovation at your organisation.
Every organisation is different and when it comes to corporate innovation, there are no silver bullets but my hope is that the following triggers your thinking and supports the development of incentives that truly incentivise innovation, in line with the corporate strategy, and provides a much needed move away from rudimentary and input focused metrics such as “number of ideas raised” which seem to be gaining prominence in many organisations.
Define Your Objectives
Why is your organisation looking to incentivise innovation?
This may sound like an arbitrary question but stay with me.
In the early stages, most companies might harbour desires to become the next Google or Apple, much like most cities want to become the next Silicon Valley.
As ridiculous as this might sound, aspirations can be a great source of motivation and the real desire here is to become more innovative and create more impact.
Step one for most is not going from zero to one and bringing new products to market that blow people’s minds but shifting mindsets and culture from one planted in 20th Century industrial revolution-grounded management science to one that supports the behaviours required to drive innovation today, you know… in 2017.
The rate of change is simply too fast for companies to rest on their laurels and continue to treat people like widgets on an assembly line whose sole priority is survival. This may have made sense in the post-war 20th Century, but not today.
So how do we identify our objectives?
Figure out where your company sits on the Hierarchy of Needs for Corporate Innovation pyramid when defining your overarching organisational objectives.
Clearly defined objectives will go a long way to defining the backdrop for the types of initiatives your company will pursue and the KPIs and incentives used to monitor these initiatives and reward contributions accordingly.
The very bottom of the pyramid is all about raising awareness and culture change and as we make our way up the pyramid, we focus on capability uplift, incremental innovation and eventually adjacent and disruptive innovation.
- Culture change
- Capability uplift
- Brand uplift (association with innovation and creativity)
- Tangible outcomes (cost savings or new revenue lines)
Type Of Innovation
In addition to our overarching objectives, the type of innovation being sought will also play into the types of KPIs and incentives you’ll use to assess people’s individual performance.
The 3 types of innovation
Horizon 1 incremental innovation: extend and defend the course business (eg. iPhone 7S)
Horizon 2 adjacent innovation: build new lines of business by combining your core assets with new technologies or business models (eg. Uber Eats)
Horizon 3 disruptive innovation: create new breakthrough businesses
This could be doing something radically better or cheaper (eg. Netflix) or creating an entirely new market (eg. Apple iPad).
While it will be different for every organisation, conventional wisdom suggests that the split of R&D investment across the three horizons should resemble something like the following:
Horizon 1: 70–80%
Horizon 2: 10–20%
Horizon 3: 5–10%
Now it stands to reason that the workforce distribution and education the organisation delivers should also reflect this (eg. not everybody needs to learn the lean startup methodology, some might get by with a traditional waterfall product development lens).
The old Facebook mantra of “move fast and break things” might work well when exploring disruptive innovation, but not so much for those focused on improving core assets that already make money.
I don’t imagine a banking architecture lead in charge of core personal banking assets would want to break anything anytime soon and perhaps that’s why Facebook too, now a listed company with a US$492B market cap has updated its mantra to “move fast with stable infrastructure”.
The good news for most organisations is that more than half of the organisation still need to focus on delivery and incremental improvement of the existing business model, which is what they’re pretty good at doing already. It comes back to that “what we make money today with” thing.
Highlighting the different mindset between H1 and H3 innovators
The above table makes it clear why we can’t measure everybody with the same yardstick because the attitudes and behaviours required to be successful when exploring the different types of innovation are almost diametrically opposed.
Next up, based on your objectives and type of innovation sought, it’s time to define your KPIs for the different areas.
One helpful way of doing this is to put KPIs into three buckets: input, outcome and hard measures.
- participation in sprints/hackathon
- mentoring startups in accelerator
- contributing to innovation program dev
- attend conference/meetup/meetings
- contribute to innovation surveys or customer testing
- courses or workshops taken
- prototypes built
- experiments run
- data collected
- learnings mapped to innovation metrics or the lean canvas building blocks
- people engaged in initiative
- course or workshop results
- products to market
- customer # generated
- revenue generated
- sign ups
- cost savings
- time savings
Finally, if people meet their KPIs, how do we incentivise them?
First up, given the stigma that still exists around failure at most large companies, the reward should be large enough to offset any perceived risk of a downside.
To this point, incentives for the achievement of the Outcome and Hard KPIs defined earlier, should be greater than that for simple Input KPIs.
Incentives normally fall into one of two buckets, intrinsic or extrinsic.
Think money, time, public recognition, prizes (perhaps tickets to attend a hot tech conference — SXSW anyone?!).
In some cases, if the organisation has set up, say, a spin-off to explore disruptive innovation, or many spin-offs, then you could go the extra mile and reward ‘employees’ with funding and/or equity in the new ventures.
In some cases, an employee might be taking part in a formal corporate innovation program, of which there are many, such as spin-ins, incubators or labs, innovation teams, startup accelerator programs and the aforementioned spin-outs and these might also dictate the shape of your KPIs and incentives.
Each program is likely to have different inputs, outputs and tangible outcomes.
As mentioned, creating and nurturing a spin-off organisation to explore new innovation might warrant the offer of equity in the new venture or funding as an incentive.
For example, an employee working on a corporate startup accelerator program might have the following input, outcome and hard KPIs.
Input: set-up website, run marketing, facilitate information night
Outcome: number of applications received, number of media mentions
Hard: number of startups that receive investment at the culmination of the program, number of startups that demonstrate traction
Now unless the employee’s role is dedicated to innovation only which won’t be true for most people in the organisation, then you’ll need to factor their performance on factors of innovation into their delivery of business as usual.
In some cases, say for the 70% of employees focused on incremental innovation, we might expect that 10% of their duties are focused on innovation.
As such, when evaluating the employee’s performance as a whole we should give innovation the appropriate weight.
Similarly, the distribution of their time spent on innovation may not fall entirely into H1, H2 or H3 innovation and in some cases may run the entire gamut so you’d need to take this into consideration.
The 3 D’s
At Collective Campus, I have monthly catch-ups with each of my team members and use a simple method I’ve dubbed the 3D’s which may not be suitable for all companies but works for us.
D1: Delivery of day to day expectations. Creating content, facilitating workshops, client consultations, business development and running marketing campaigns are all day to day expectations.
D2: Ongoing learning and development. As a knowledge-driven organisation that strives to be adaptable and pass our knowledge onto clients, it’s imperative that everybody is learning new things every day and also shares this knowledge with the rest of the team.
D3: Discovery of new opportunities.This is where we practice what we preach as an innovation educator and consultancy. I place a 33% weighting on how people contribute to our constant reinvention and discovery of whatever can help us create more impact, whether that be business model innovation, game changing growth hacks or new products such as our Lemonade Stand program.
The sobering reality is that there’s not going to be any one cookie cutter incentive that can be applied across your entire organisation.
The KPIs and incentives for each employee you use will ultimately depend upon the objectives and types of innovation outlined earlier and whether or not they’re engaged on a formal innovation program as well as what they want to focus on.
Some employees will be much happier simply executing on their core roles and responsibilities, and in many cases this might well and truly be where you get the most value from such employees.
Let’s look at two distinct examples.
Mary, IT Architecture Manager
Organisational focus: Tangible outcomes
Employee focus: Horizon 1 incremental innovation
Input: Putting together business case for new improvements
Outcome: Implementation of proposed changes
Hard: Cost savings
Incentive: Bonus, promotion, salary increment or new development opportunities
Tom, Innovation Manager
Organisational focus: Tangible outcomes
Employee focus: H3 Disruptive innovation
Input: Setup, marketed and ran an internal idea challenge
Outcome: Number of H3 ideas received that align with the organisation’s strategy
- Number of ideas that received some form of early validation
- Employee survey results measuring mindset
- Funding to run an incubator for ideas that passed an initial validation exercise such as a hackathon
- Recognition by way of internal events and/or features in business and innovation media
Your incentives, especially insofar as exploring Horizon 2 and 3 innovation is concerned, should be set up to encourage and celebrate small failures that deliver valuable learnings and serve to optimise the company’s Return on Failure (ROF).
Remember the Chinese proverb that “difficult ending is new beginning in disguise”.
As such, failure is learning in disguise, and the faster our organisations and their people get comfortable with the concept, the more likely they are to navigate the uncertainty and ambiguity that today faces every organisation on the planet.