Motivating innovation is a critical part of designing incentives. Some previous research has shown that shareholders often must motivate managers to pursue more innovative business strategies. Gustavo Manso examines aspects of an incentive structure in his paper, “Motivating Innovation.”
Manso finds that the optimal incentive scheme motivates innovation by exhibiting substantial tolerance for early failure and reward for long-term success. Additional critical components to encourage innovation and new ideas include commitment to a long-term compensation plan, job security and timely feedback on performance. Furthermore, in regards to managerial compensation, Manso writes that this incentive program can be implemented into an organization via a combination of stock options with long vesting periods, option re-pricing, golden parachutes and managerial entrenchment.