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  • Spring 2023
  • Article
  • Contemporary Accounting Research

Incentive Contract Design and Employee-Initiated Innovation: Evidence from the Field

By: Wei Cai, Susanna Gallani and Jee-Eun Shin
  • Format:Print
  • | Pages:32
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Abstract

This study examines how the design of incentive contracts for tasks defined as workers’ official responsibilities (i.e., standard tasks) influences workers’ propensity to engage in employee-initiated innovation (EII). EII corresponds to innovation activities that are not formally assigned to workers but are nonetheless encouraged and considered important for the company's success. We leverage field data obtained from a manufacturing company that uses a dedicated information system to track workers’ EII idea submissions. We find theory-consistent evidence that, compared to workers receiving fixed pay, employees rewarded for their standard tasks with variable compensation contracts exhibit a lower propensity to engage in EII. This result is particularly evident when we consider innovation ideas narrowly focused on the standard task (i.e., narrow-scope ideas) versus ideas benefiting other constituents and activities beyond the proponents’ standard task (i.e., broad-scope ideas). Our findings suggest that variable pay narrows employees’ conceptual focus around the standard task and hinders employee engagement in broad-scope innovation activities compared to fixed compensation contracts. We contribute to the nascent literature on incentives for employee-initiated innovation and to the growing stream of research examining the determinants of different types of innovation.

Keywords

Employee-initiated Innovation; Contract Design; Rank-and-file; Extra-role Behaviors; Compensation and Benefits; Motivation and Incentives; Innovation and Management

Citation

Cai, Wei, Susanna Gallani, and Jee-Eun Shin. "Incentive Contract Design and Employee-Initiated Innovation: Evidence from the Field." Contemporary Accounting Research 40, no. 1 (Spring 2023): 292–323.
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About The Author

Susanna Gallani

Accounting and Management
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    • 2023
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    Conduit Incentives: Eliciting Cooperation from Workers Outside of Managers' Control

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    Incentive Effects of Subjective Allocations of Rewards and Penalties

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    Emory Healthcare on the Front Lines of the Nursing Workforce Crisis

    By: Susanna Gallani, Karen L. Sedatole and Sarah Mehta
More from the Authors
  • Conduit Incentives: Eliciting Cooperation from Workers Outside of Managers' Control By: Susanna Gallani
  • Incentive Effects of Subjective Allocations of Rewards and Penalties By: Wei Cai, Susanna Gallani and Jee-Eun Shin
  • Emory Healthcare on the Front Lines of the Nursing Workforce Crisis By: Susanna Gallani, Karen L. Sedatole and Sarah Mehta
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