“Winner-Takes-All” Pay Structure May Be Biggest Driver of Innovation
A new study reveals that a competitive “winner-takes-all” pay structure is most effective in empowering workers to come up with novel ideas and solutions.
Innovation is a major force behind economic growth, but many experts disagree on what is the best way to encourage workers to produce the “think-outside-of-the-box” ideas that lead to better products and services.
For the study, researchers from the University of California (UC), San Diego, partnered with Thermo Fisher Scientific, one of the globe’s largest biotech companies, to hold an innovation contest.
Participants in the competition, which was open to all non-management employees of Thermo Fisher and other tech companies in the region, were asked to design digital solutions to help share medical equipment across small healthcare clinics in the region.
The competition was created to test which of two common compensation models produced more novel ideas. Participants were randomly selected to compete in either the “winner-takes-all” category, in which there was one prize of $15,000 awarded to first place, or the “top 10” category, in which the same amount of prize money was spread out among the top 10 entries.
The entries were judged by a panel of six experts. Half of the judges were from industry (Thermo Fisher and Teradata) and the other half were from academia (computer sciences professors from local universities in the Baja California region).
The novelty of the submissions was rated on a scale from 1 to 5, relative to what is currently and/or soon to be available on the market. The lowest possible score (1) was given to proposed solutions already on the market, and the highest score (5) was awarded to submissions in which no one else has thought of a similar idea.
Those who entered could work as an individual or in teams. The findings show that team submissions in the “winner-takes-all” category were more novel than the team entries in the “top 10” category.
The results of teams vs. individual entries in both categories are consistent with other studies, showing that teams with diversified skill-sets and deepened professional experience produced better entries than that of individuals.
Subsequently, participants in both categories were surveyed on their risk preferences. Not surprisingly, those less averse to risk performed better in the “winner-takes-all” category.
In addition, women who submitted entries in the contest performed better than average in both categories of the competition.
The study was authored by professor of economics Dr. Joshua Graff Zivin and assistant professor of management Dr. Elizabeth Lyons.
“Participants under the winner-takes-all compensation scheme submitted proposals that were significantly more novel than their counterparts in the other scheme,” said the authors of National Bureau of Economic Research (NBER) working paper, who both hold appointments with the UC San Diego School of Global Policy and Strategy.
“While the two groups did not statistically differ from one another on their overall scores, the risk taking encouraged by the competition with a single prize resulted in innovators pursuing more creative solutions.”
They added, “These findings are significant because the 21st century economy is one that prizes novelty. Firms view it as an important source of comparative advantage. It is also an essential ingredient in the development of technological breakthroughs that transform markets with major impacts to consumers and producers.”
Though there was more risk vs. reward in the “winner-takes-all” category, both produced the about the same number of submissions (20 in “top 10” category and 22 in the “winner-takes-all” category), indicating that having less of a chance of winning a monetary award did not have an impact on the amount of work output.
In conclusion, the authors noted that genius is not created by incentives, but empowered by them.
“It is important to recognize that incentives alone are insufficient to spark creativity,” they wrote. “More work is required to understand the raw ingredients that shape the relationship between creativity and compensation.”
Pedersen, T. (2020). “Winner-Takes-All” Pay Structure May Be Biggest Driver of Innovation. Psych Central. Retrieved on August 3, 2020, from https://psychcentral.com/news/2020/02/17/winner-takes-all-pay-structure-may-be-biggest-driver-of-innovation/154273.html