Incentives and Innovation : A Multi-Tasking Approach

This paper examines how employees trade off planned activities versus unplanned innovation, and how firms can choose incentives to affect these choices. It develops a multi-task model where employees makes choices between their assigned standard tasks, for which the firm has a performance measure and provides incentives, and privately observed innovation opportunities that fall outside of the performance metrics, and require ex-post bargaining. The model shows how firms adapt incentive compensations in the presence of such unplanned innovation. If innovation are highly firm-specific, firms provide lower-powered incentives for standard tasks to encourage more innovation, yet in equilibrium employees undertake too few innovation. The opposite occurs if innovation are less firm-specific. We also investigate the effectiveness of several possibilities to encourage innovation, such as tolerance for failure, investing in employee innovation, stock-based compensation, and the allocation of intellectual property rights