Designing HR practices that stimulate innovation
Based on an interview with Antonio Giangreco and on his article “Crowding-out or crowding-in? Direct voice, performance related pay, and organizational innovation in European firms” (Human Resource Management, 2020), co-written with Edoardo Della Torre (Università degli Studi di Bergamo) and Meysam Salimi (Università degli Studi di Brescia).
Giving employees voice is key to company innovation. A new study explains how HR reward schemes need to be designed, carefully balancing individual and collective incentives, so as to reinforce, and not stunt, the effects of employee voice.
Employee voice: a key factor for innovation
Decathlon’s wildly successful ‘2-second tent’ is a famous example of employee innovation, of the kind that help companies keep the lead in such a competitive market as the sports-goods sector. “A loyal and engaged workforce often lies behind company innovation,” says IÉSEG Professor Antonio Giangreco. To get the most added value from their workforce, companies need to give their employees voice and open communication channels. Through this, employees will feel involved in company decisions and be empowered. Giangreco adds, “Strong employee voice increases company capacity to innovate.”
Giangreco and his colleagues Edoardo Della Torre and Meysam Salimi found further evidence to support employee voice effects on innovation. They looked at how Human Resource Management (HRM) practices – such as reward systems – can be set up to foster both employee voice and innovation.
When it comes to recognizing employees for their hard work, there are two types of reward. Some rewards are collective which means that they are offered to all the employees – like profit sharing – and are associated with a supportive organizational culture. Other rewards are individual – like commission or brokerage payments – and are often associated with a controlling organizational culture. The impact of these forms of incentive is different: collective incentives reinforce both the extrinsic and intrinsic motivation of employees to innovate, whereas individual incentives reinforce extrinsic motivation, which leads to task-focused behaviors, and reduce intrinsic motivation to innovate.
To better explain why these two types of reward might influence employee voice and company innovation, Giangreco draws parallels to intrinsic and extrinsic motivations in society. “In many countries, tax breaks encourage companies to donate to charity. A external reward for donating may encourage further donations from those companies that are already intrinsically motivated by charity initiatives” The team proposed that supportive incentives stimulate donation in the same way that collective reward systems might stimulate employee voice and innovation. He adds, “On the other hand, some countries offer an unemployment salary, which – instead of encouraging the unemployed to look for a job – can actually discourage job searching.” Here, the team parallel this employment-stunting behavior to individual reward systems that they supposed to have a similar stunting effect in firms.
Individual reward systems stunt innovation
In their study, Giangreco and his co-authors analyzed data from more than 22,000 European companies related to company innovation, individual and collective rewards, and direct employee voice, which occurs through direct channels between employees and managers (rather than the indirect voice mediated by unions and committees, etc.). In this context, direct employee voice is thought of as a form of inherent motivation, which may be affected by the reward system.
Their analysis confirmed that companies that have policies promoting direct employee voice have more capacity to innovate. In addition, in companies that encouraged employee voice and had individual reward systems in place, the relationship between employee voice and innovation was weaker. Giangreco notes, “Here, we see that the prospect of the individual reward kicks out the intrinsic motivation that should be provided in having strong employee voice and involvement in decisions.”
In these circumstances, the individual reward appears to counteract the empowerment employees get by being given a voice. This stunts innovation. In motivation crowding theory this is called the ‘crowding out’ effect. The opposite of this is ‘crowding in’, which occurs when employees are intrinsically motivated and feel supported to work towards the greater good of the company. This stimulates innovation.
Combined reward systems stimulate innovation
So how to stimulate innovation through reward systems? The team found that when companies employ both collective and individual reward schemes, the relationship between employee voice and innovation is stronger. However, this was not the case with collective reward schemes alone. Giangreco says, “When both collective and individual reward systems are implemented, they create synergies and work better together.”
Innovation success with employee voice: Decathlon
Giangreco noted that the HR practices in place at international sports retailer Decathlon, are a golden example of how to foster innovation through employee voice. “Decathlon offers every employee the opportunity to develop a new product, it has a flat hierarchical structure with an open communication scheme. This gives employees cohesion and a sense of membership. They also get to see their ideas recognized.”
He concludes that, in organizations like Decathlon, we see a virtuous circle. Employees are keen to get involved and help innovate. He says, “Employees also have freedom to fail – this is key. Mistakes are not stigmatized. They need to be encouraged to try as without trying there is no success and no innovation.” Other organizations, where mistakes are stigmatized, end up in a vicious circle. Giangreco points out: “If employees are scared of making a mistake, they won’t share knowledge and ideas. They won’t use their voice, and the company will struggle with innovation.”
The researcher stresses that companies with stunted innovation need to strengthen their employee voice and improve communications between employees and management. They then need to think hard about the HR reward system in place and adapt it to make the most of having strong employee voice.
“Companies need to be very careful when they develop HR practices and introduce reward systems,” says Giangreco. “It is important to foster employee voice to increase innovation. But, companies must be aware that, adopting individual reward systems alone, can quash the beneficial effects that a strong employee voice can have on innovation.” He adds, “A system that gives employees voice and has collective and individual rewards works best.” Overall, the study provides managers with more complete information about the potential synergies and “deadly combinations” in the design of a human resource management system.
The authors analyzed information from more than 22,000 European firms in Eurofund’s 3rd European Company Survey (ECS), 2013 database. They used this to measure company innovation, direct employee voice and collective and individual reward systems in place, and test their hypotheses.