Faculty of Economics and Business Administration Publications Database

Innovation Management in Organizations

Volume: 53
Number: 8
Pages: 871 - 887
Month: November
ISSN-Print: 0014-2921
Link External Source: Online Version
Year: 2009
Keywords: Incentive pay; Innovation; Delegation
Abstract: This paper poses the question of how a firm should optimally choose both its organization and its compensation in the pursuit of innovation. One key result is that incentive pay arises as a robust instrument of innovation management both with and without delegation, although in the present model its primary purpose is not to elicit more effort for the creation of new ideas, but to ensure that new ideas are implemented if and only if this is efficient. While without delegation, the firm may “underinvest” in innovation, with delegation the opposite bias may arise as new ideas may be implemented too often (“overinvestment”). The optimal organizational choice trades off these two biases.