Economists and business leaders agree that innovation is a major force behind economic growth, but many disagree on what is the best way to encourage workers to produce the ‘think-outside-of-the-box’ ideas that create newer and better products and services. New research indicates that competitive ‘winner-takes-all’ pay structures are most effective in getting the creative juices flowing that help fuel economic growth.

The findings are based on a study authored by professor of economics Joshua Graff Zivin and assistant professor of management Elizabeth Lyons who partnered with Thermo Fisher Scientific, one of the globe’s largest bio tech companies, in creating a contest for the Baja California office. 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. Those who signed up 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.

«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.»

How firms can produce more creative ideas with a limited amount of resources

Most modern-day mechanisms created by chief technology officer (CTOs) and management gurus designed to spark innovation often rely on performance-based-pay and hinge on assumptions regarding the ability and ambitions of employees and their risk preferences. However, the results from the NBER paper show that with identical groups of innovators, companies can increase the innovative output of employees just by changing how they pay them.

Story Source:
Materials provided by University of California — San Diego. Original written by Christine Clark. Note: Content may be edited for style and length.