Motivating Innovation

Charlie Baecker — Tue, 17 Jan 2012 19:38:00 GMT

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.

Paper

Non-compete Covenants: Incentives to Innovate or Impediments to Growth

Charlie Baecker — Tue, 17 Jan 2012 19:33:00 GMT

Non-compete covenants are clauses written into contracts that expressly prohibit individuals from competing with former employers. Particularly for technical workers and upper-level management, they have developed to become a common feature of employment contracts. Sampsa Samila and Olav Sorenson research this issue and determine whether they encourage innovation or impede growth in their paper, “Non-compete Covenants: Incentives to Innovate or Impediments to Growth.”

They find that the enforcement of non-compete clauses significantly impedes entrepreneurship, employment growth and innovation. The authors believe that this may be due to the fact that the “value of the recombination of knowledge facilitated by the elevated mobility of individuals across firms might outweigh the greater incentives to innovate afforded by the enforcement of these non-compete covenants.” Furthermore, their results show “relative to states that enforce non-compete covenants, an increase in the local supply of venture capital in states that restrict the scope of these agreements has significantly stronger positive effects on (i) the number of patents, (ii) the number of firm starts, and (iii) employment.” Finally, their findings point to a strong interaction between financial intermediation and the legal regime in promoting entrepreneurship and economic growth.

Paper

Innovation @ Merage - UCI Paul Merage School of Business : Organization/Staffing, Innovation, Incentives

Motivating Innovation

Non-compete Covenants: Incentives to Innovate or Impediments to Growth