Chapter 5

Incentives for Enterprise

 

Changing the attitude and behavior of hundreds of thousands of people is very, very hard to accomplish. …You can't mandate it, can't engineer it. What you can do is create the conditions for transformation. You can provide incentives.

—Lou Gerstner, Former CEO of IBM¹

INDEED, INCENTIVES ARE the most powerful practice for creating a culture of innovation. However, traditional incentives in many organizations may be aligned for seniority, loyalty, or sales productivity, but not for innovation. We may believe that rewards for seniority and loyalty increase productivity and retain good employees. Our instinct is to treat failure as bad and success as good. So we reward success and penalize failure. Even for little children, we use rewards to motivate good behavior and penalties to discourage bad performance. But are these beliefs, instincts, and practices good for innovation? This chapter shows why traditional incentives stifle innovation, why failure must not be shunned, and why incentives for enterprise promote innovation. Incentives for enterprise are asymmetric, with strong rewards for success and weak penalties for failure in innovation. This chapter discusses the power and characteristics of incentives, including their economics and psychology.

Traditional Incentives: Winning Loyalty

Traditional incentives are often based on longevity in the organization, with perks and rewards increasing based on the number of years of employment. This incentive scheme has many motivations. First, it is based on a simple, easily measured and implemented scheme. Second, it motivates loyalty to the organization and reduces the costs of employee turnover. Third, unions prefer it perhaps because it is objectively tracked and fosters social equity (in contrast, enterprise-based incentives can lead to much inequity). However, traditional incentives based on longevity do not foster innovation. Such incentives reward employees even when their performance falls below average so long as they put in the years. Longevity-based incentives motivate employees to hang on to an organization even when they are underperforming. Over time, organizations with longevity-based incentives will be left with loyal employees but not their innovators, who would have jumped ship to join organizations that better reward innovation.

Traditional incentives are often tied to seniority in the organization, with higher incentives reserved for senior managers and lower incentives for junior managers. If seniority itself is based on longevity, then such incentives have all the disadvantages of longevity-based incentives. Moreover, rewarding seniority rather than enterprise stimulates envy and status flaunting but not innovation.

Traditional incentives are also often tied to sales of existing products or satisfaction of current customers. However, even such performance-based incentives do not foster a culture of innovation. Focusing on existing products instead of new products encourages attention to current details but hampers new ideas and innovations for the future. Linking incentives to current customer satisfaction limits development of new markets and customers that may become important in the future.

To foster innovation, firms need incentives for enterprise. Such incentives, unlike traditional ones, reward employees for developing and implementing innovations: new ideas, products, services, or businesses. In such a system, bonuses, raises, promotions, and perks are all tied to the quality and number of innovations. Even young or new employees may do better than veterans in this system.

One important characteristic of incentives for enterprise is that they are asymmetric in their reward structure: strong rewards for success with weak penalties for failure. An asymmetric incentive structure encourages employees to take on risky projects, a prerequisite for innovation (see Chapter 3). Failure naturally elicits shame. Reinforcing or even maintaining such natural reactions to failure suppresses risk taking. Embracing and learning from failure can be powerful and encourages risk taking.

Asymmetric Incentives: Turning Failure into Success

For many incumbents embracing failure goes contrary to the grain of good management practice. Progress is measured by good results. Failure is penalized. Executives from organizations have told me that their organizations do indeed have asymmetric incentives, but they are the opposite of that proposed here: they offer weak or no rewards for success and strong penalties for failure! Why does this come about? Success is part of the implicit contract in employee hiring; so is avoiding failure. Thus, the incentive structure takes success for granted and does not especially reward it, but punishes failure. In particular, one senior executive of a major multinational corporation once lamented that his employees were risk averse. On further discussion I found out that the problem was not with the employees but with the corporation. It had low rewards for success with innovations but penalties for failure. The result was risk-averse employees.

A formal study by Professors Gina O'Connor and Christopher M. McDermott found a pervasive reward structure that was not conducive to innovation.² Over six year, the authors studied ten large established firms including IBM, 3M, DuPont, GE, Texas Instruments, and Nortel Networks. The authors found that in most cases, firms provided what I call perverse incentives: strong penalties for failure but weak rewards for success. As one innovator told them, “The origin of the breakthrough success is often forgotten, but an R&D effort that does not succeed is never forgotten.” In another case, when sales forecasts of an innovation were not met, a team member was “put in the penalty box.” Most team members viewed innovation projects as career risks, given the low probability of success and high penalties for failure. As a result, key team members threatened to quit (and often did) during or after the project or were fired during the project.

In sharp contrast to this practice, the asymmetric reward structure that I call incentives for enterprise involves strong incentives for success with weak or no penalties for failure. Such an incentive structure motivates innovation. Innovation requires exploring new possibilities, traveling unexplored terrain, and investing in uncertain options. Failure is common (see Chapter 3). In an environment where the individual is allowed to fail and learn from failure, innovation thrives. In a culture where errors are shamed, innovation suffers. Jeffrey Pfeffer of the Stanford School of Business warns, “Companies that want to encourage innovation and entrepreneurship therefore have to build a forgiveness culture, one in which people are not punished for trying new things.”³

In practical terms, to create innovations firms must allow for a process of trial and error in which unsuccessful innovations are redesigned or discarded in favor of ultimately successful ones. If employees are not assured that failures will be tolerated, they may hesitate to take risks. Without risks, there will be less trial, experimentation, and endeavor, which are essential for success. Raj Shah, a director of engineering at Google, echoes that view: “Our philosophy at Google is fail early, fail often, move on. If the innovator took a risk, failed, and admitted failure, then we keep investing in him or her; while if the risk taker fails to admit the failure [italics added], we stop investing in him or her.”⁴

Research shows that the fear of real or possible sharp criticism about work or failures undermines creative and innovative activity.⁵ Feedback and evaluations that provide balanced corrective information, however, enhance creativity.⁶ Further, to encourage innovations, innovators must be protected from any monetary penalties for failure. Incentive schemes geared to fostering innovation must tolerate and even reward failure, especially in the early stages of the innovative process.⁷

For example, Steve Jobs is well known for his fanatically high standards for quality in Apple's innovations. Yet even with these high standards, Jobs had a simple rule for failure that eschewed penalties: “Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving your other innovations.”⁸ Jobs is celebrated for his successes. But he also had numerous failures, including the over-priced iPhone 8GB, the faulty iPhone antenna, the hardware produced by NeXT, the initially slow sales of the iPod, the failure of the Apple III, the overheating of MacBooks, and most notably the failure of Lisa. The latter two failures resulted in his biggest failure, being fired from the company he founded. It was a low point of his career. But reflecting on it later, Jobs said, “I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life.”⁹

Attitudes to failure vary substantially by culture. Failure seems to be shunned more in traditional or eastern societies than in modern or western societies. Countries with a tradition of exploration and enterprise seem to have the greatest tolerance for failure. Actually, the tolerance for failure may well be a primary driver of such exploration and enterprise. In this respect, two countries seem to stand out, the United States and Israel. Of all large countries in the world, the United States is a bastion of entrepreneurship. Several factors account for that. Not the least is its tolerance for failure, especially in entrepreneurial pockets such as Silicon Valley. For example, in the Valley, bankruptcy is a badge of honor.¹⁰ Steve Jobs had this to say about entrepreneurship in the Valley, “The penalty for failure, for going and trying to start a company in this Valley, is nonexistent.”¹¹ In contrast, in Europe and especially in Japan, failure is penalized. For example, German law does not allow anyone who declares bankruptcy to become the CEO of a corporation.

Steven Sasson, the inventor of the digital camera, has this to say about nurturing invention:

The ideal way is not to just look to the experts, look to people who have a passion to explore and those who are not afraid of making mistakes. …Thomas Edison was a prolific inventor and he was always surrounded by people who thought they were all better than him. Inventors spend most of the time being wrong and liking it, being comfortable with failure, because that is how you learn. Inventors have to be resolute and the environment should be tolerant to you. You have to spend a lot of time being wrong than being right.¹²

Israel is another country with a high tolerance for failure, which fosters a highly entrepreneurial climate. Two reporters describe the culture as follows: “Israeli culture and regulation reflect a unique attitude to failure, one that has managed to repeatedly bring failed entrepreneurs back into the system to constructively use their experience to try again, rather than leave them permanently traumatized and stigmatized.”¹³ Much of this culture is fostered in the military, in which all citizens must serve. Recruits are trained early to face unexpected dangers, make quick decisions, and take responsibility for their actions. However, the reward system encourages risk taking, as one air force officer said, “We don't finish you off permanently for a bad performance.”¹⁴ In Israel, laws regarding bankruptcy are lenient enough to make it one of the easiest places in the world to start a fresh company after a bankruptcy.¹⁵ That tolerance is critical. Research shows that failed entrepreneurs have a 20% chance of success in their next enterprise, higher than that of new entrepreneurs but not much lower than that of successful entrepreneurs.¹⁶

Perks are also a major means of incentivizing innovations. In some established corporations, perks such as fancy offices, reserved parking, company cars, and company jets are tied to rank, seniority, and longevity within the company. Indeed, the corner office or 27th-floor glass office can become symbols to flaunt. But in some highly innovative corporations, even the CEO has only a cubicle. When Gordon Moore, cofounder and CEO of Intel, who was worth billions, was once asked why he had no more than a cubicle without a door or window, he replied, “In a business like this, people with the power are the ones with the understanding of what's going on, not necessarily the ones on top. It is very important that those people who have the knowledge are the ones who make the decisions. So we set up something where everyone who has the knowledge has an equal say with what was going on.” Moore's implicit message was that the lowly engineer working on routine innovations was valued as highly as the CEO and founder. Windowed offices, heavy doors, and gold-plated fixtures were not symbols of achievement. Facebook has gone a step further with open working spaces that do not even have cubicles. It has peeled away status, perks, and walls to create an atmosphere of openness, equality, and intense interaction for innovation.

Thus, incentives for enterprise must be based on innovative performance and not on seniority or longevity or even performance on current products. Such incentives must be asymmetric, with strong rewards for success and weak penalties for failure. Constructing such incentives requires constant watchfulness and deliberate intent, because the natural human tendency is just the reverse: to shame failure and overlook success or take it for granted.

Making Incentives Work: Economics and Psychology of Incentives

Economic theory suggests that human behaviors (activities) can be priced and that desired activities can be motivated by suitable monetary incentives. Positive incentives consist of monetary incentives (salary, bonus, stock options), perks (titles, office, planes, and so forth), and nonmonetary incentives (awards and honors). A major challenge with incentives is deciding which metric to link them to. Incentives tied to sales of current products will lead to a focus on and increase in sales of current products. Incentives tied to current publications will lead to a focus on and increase in publications. One chief technology officer of a major multinational corporation said to me of their one-time strategy, “We judged people on papers, so they wrote lots of papers.” Incentives tied to patents will lead to an increase in patents. Incentives tied to innovation will lead to an increase in innovations. That is surely important, but may not be enough. A vice president of research labs for another major multinational said to me, “We have innovations sitting on the shelf.” In this latter case, incentives were even designed for developing innovations, but not for commercializing them.

Incentives for enterprise must be tied to commercialized innovations. Possible metrics may be a percentage of sales of new products developed in the last few years, a percentage of sales from new markets, or long-term growth. A combination of metrics is better than any single one, so as to avoid employees' gaming the system.

Research suggests that in general, linking salary, bonus, and stock options to a firm's innovativeness enhances the overall performance of the firm. In particular, recent studies of the relationship of incentives to innovation found the following results:¹⁷

• The ratio of long-term incentives (for example, stock options) to total compensation for senior executives (for example, CEO and R&D head) varied from 42% to 32%, being higher for more senior executives.
• For firms with centralized R&D, more long-term incentives are associated with greater innovation productivity (such as citations, filings, and originality of patents).
• The greater the technological intensity of a firm, the more the CEO bonuses are tied to financial results and the more CEO total incentives are linked to evidence of influential innovations.
• As technology intensity increases, aligning bonus with financial results better predicts firm performance.

Monetary incentives also have limitations. The psychology of incentives suggests that providing a monetary incentive (that is, putting a price) on some behaviors is costly, less effective than nonmonetary incentives, and can backfire. Four examples reveal counterintuitive principles of the psychology of incentives.

Moral Incentives

Two economists wanted to see if small penalties could prevent parents from arriving late to pick up their children from day care.¹⁸ So they designed an incentive system that fined parents $3 per late pickup of a child. This was small compared to the monthly fee of $380 for the service. Instead of tardiness decreasing, it doubled. The economists next tested what would happen when they stopped the fine. However, the number of late-arriving parents did not decline from the new higher rate. What explains this economically irrational behavior?

To understand this, one must realize there are three types of incentives: monetary, moral, and social.¹⁹ In this case, the penalty of $3 was a monetary incentive. But there was a more powerful moral incentive at work. That was the guilt of being late. When the penalty was imposed, the $3 fine absolved parents of the guilt of being late, but was too small to serve as a monetary disincentive—substantially less than it would cost for a babysitter. Moreover, a parent could be late every day of the month and only incur an additional $60, much less than monthly service. Financially, it was cheaper to be late! So, the incentive backfired and did not achieve the goal intended.

Once instituted, removal of the penalty did not provide any new incentive to be on time. The small fine had put a value on the parents' guilt—$3. So, when it was removed, they could still arrive late, pay no fine, and now feel no guilt!

A large penalty of $100 for each time late would have worked better than the $3. But that would also have caused much ill will, as parents would have felt that the day-care center was profiteering from uncontrolled events that caused them to be late. So what should have been done? The day-care center could have heightened the guilt for being late and worked with parents who were repeatedly late. This example shows how moral incentives can be more powerful than some monetary incentives. It also shows how the psychology of incentives is as important as their economics.

Social Incentives

In 1993, the Swiss government identified two small towns as potential repositories of the country's nuclear waste program.²⁰ Many of the townspeople were deeply concerned about the prospect of living so close to a nuclear waste repository. Two researchers tested the effectiveness of incentives in motivating people to accept the repository. They first surveyed respondents to ascertain their base receptivity to the repository. Fifty-one percent of the people agreed to the location. To increase receptivity to the repository, the researchers repeated the survey with three different levels of compensation: $2,175, $4,350, and $6,525. However, the receptivity to the repository declined by about half when the incentive was offered, without significant difference across the three levels. All those who rejected the first incentive were then made a fresh offer with a higher incentive: from $2,175 to $3,263, from $4,350 to $6,525, and from $6,525 to $8,700. Only one new person was willing to accept the repository at the higher offer. What explains this economically irrational behavior?

The first 51%, who were receptive to the repository, probably did so out of a sense of social obligation—a feeling of national pride or a sense that it was the fair sacrifice for the common good. When money was introduced into the equation, it may have put a monetary value on the choice. For some, this value was probably less than the social obligation. For others, it may have appeared as a choice of making quick money versus the dangers of the dumpsite. This case shows that the power of social incentives was more effective than the pull of economic incentives.

What could have been done? A better strategy would have been for the government to more clearly explain to residents the social benefits of the repositories of the nuclear waste program that motivated the scheme in the first place and appeal to their sense of social obligation.

Firms can use moral, social, and monetary incentives to motivate employees. As the previous examples illustrate, moral and social incentives are more powerful than monetary at reasonable price levels and can cost less. Thus, a public award ceremony (costing $1,000) to acknowledge the innovator of the year can do more than a private prize of $1,000, because of the huge social payoff from the former. When firms are seeking deep commitment from employees for work beyond the usual hours or creativity beyond the normal, social incentives can play a big role. Unpriced perks at work such as gourmet meals, free drinks, and massages can build a social contract with employees that can motivate them to give beyond their monetary hiring contract. Behavioral economist Dan Ariely says, “Money, as it turns out, is very often the most expensive way to motivate people.”²¹

Fairness of Incentives

Recently in the United States, the federal government has encouraged states throughout the country through strong incentives to conduct standardized tests on math and science. Federal funding for education has been offered to encourage adoption of such tests and improve quality of education for low-performing schools. However, one school district found that its incentive system caused its teachers to cheat on the test that had multiple-choice answers.²² Teachers could cheat in several ways. A teacher could write the answers to the test on the blackboard during the exam. Other teachers could prepare students for the questions on the test if they had early access to the test. Still others could erase the incorrect answers and replace them with correct answers on their students' answer sheets. The corrections were probably done once the exam was over, the children had left, and the teachers had time before they had to turn in the papers.

Why did the teachers cheat? Aside from the moral issue of integrity, teachers probably cheated because the incentives were strong but they lacked the means of meeting targets in the short term. Teachers whose students did badly on the tests were likely to be sanctioned. If the entire school did badly, federal funding could be withheld for the school. Moreover, the school could fire low-performing teachers. But if students did well on the tests the teacher would likely be lauded and promoted. In the short term, some teachers may have been unable to improve students' performance on the tests due to weak students, limited resources, limited time, or their own limited abilities. Under pressure to perform, teachers may have cheated to avoid penalties and gain rewards for themselves and their schools.

The cheating was detected by studying unusual answer patterns and correlations among students in a given classroom, strange patterns within any one student's answers, and a comparison of how the students performed on the tests the year before and after the alleged cheating. The school district also conducted mock tests and had students retake the test under close monitoring. The intent was to see if students did as well on the test the second time, when no chance for cheating was allowed. The school district found that students whose answer sheets were initially determined to have been modified by errant teachers did not do as well on the tests the second time around. After making allowances for general differences in student performance, the school confronted the teachers and eventually fired those who had cheated.

This example shows the harm of strong penalties for failure coupled with difficult conditions for compliance: a system in which participants do not have a fair chance to meet goals within the time and recourse constraints. What could have been done? The incentive system could have emphasized rewards for improvement over penalties for failure, it could have been coupled with adequate training for low-performing teachers or students, and it could have set performance standards that were relative to the starting point of the teachers and the students. In that way, weak teachers, or those with weak students, could have a fair chance of winning the rewards that were offered in the stipulated time.

Framing Incentives

At one time, if you bought a book on Amazon anywhere in the world, you paid $3.95 on shipping. Many years ago Amazon instituted a policy of free shipping for sales over $25.²³ The firm found that sales increased dramatically in response. Consumers were probably buying from Amazon when they otherwise would not have and also increased amounts they bought so that they crossed the $25 threshold. However, this increase did not happen in France. Investigations revealed that in France, instead of dropping the cost of shipping from the prior level to free, the French division had charged patrons 1 franc or about 20 cents for shipping. Would a 20-cent cost difference be high enough to induce such a strong difference in consumer behavior in France relative to the rest of the world?

To find out, Amazon changed its promotion in France to include free shipping. France, like the other countries in the world, showed a dramatic increase in sales as well. Thus, a drop from 20 cents to “free” caused a dramatic shift in national sales volume, whereas a drop from about $3.95 to 20 cents did not. The pull of “free” was powerful enough to create a whole new surge in sales. “Free” suggests a huge gain as opposed to the 20 cents, which though small, suggests a real loss.

Thus, small shifts in framing incentives can cause disproportionately large changes in response behavior. In general, setting up or framing incentives as rewards (gains) rather than penalties (losses) are likely to be more powerful and motivate positive behavior. So the psychology of incentives reiterates the needs for an asymmetric incentive system.

Stories of incentives at IBM, Google, GM, and 3M illustrate these principles and pitfalls of providing incentives for innovation.

Power of Incentives: IBM's Transformation

In the mid-1990s, IBM was about to implode. This giant of the computer era, with thousands of new patents each year, was near death. There was tremendous pressure to break the company into smaller sustainable parts or do a fire sale of its assets, because the company seemed too large, bureaucratic, and lethargic to survive as one piece on its own. At this point, the board hired Lou Gerstner, CEO of RJR Nabisco and former president of American Express Company. In an enlightening book, Gerstner describes the problem at IBM as one of a stultifying culture rooted in dysfunctional incentives.²⁴

IBM became a highly profitable giant from its dominance of the mainframe computer market in the 1960s and 1970s. Tom Watson Jr., the CEO who took the firm to that position of dominance, established a strong and distinct culture at IBM. The culture permeated all aspects of IBM life, ranging from paternalism towards employees, to a rigid dress code at work, to no drinking at corporate gatherings.²⁵ Key aspects of the culture included the values of excellence in work, superior service, and respect for individual employees. But with the passing of Tom Watson Jr., the culture became highly codified into rituals that had lost their original meaning, purpose, and usefulness.

For example, superior customer service had become largely administrative, without any passion and innovation in serving changing customer needs. Excellence in everything we do became “a spider's web of checks, approvals, and validation that slowed decision making to a crawl.”²⁶ Respect for the individual “helped spawn a culture of entitlement, where ‘the individual’ didn't have to do anything to earn respect—he or she expected rich benefits and lifetime employment simply by virtue of having been hired.”²⁷ In other words, rewards were given for just being an IBM employee, without any regard for performance. As a result, very technical, competent employees were paid similarly to those less well trained and productive and below the level of compensation in the industry. Individuals could not be terminated for nonperformance because that would show disrespect to the individual, in violation of the IBM culture. As a result IBM became vulnerable to competitors. It lost market share in critical markets. Revenues dropped. It was not able to support its bloated workforce. It had to lay off 125,000 employees.

By the end of his nine-year tenure, Gerstner had transformed the company into a highly innovative, nimble, and effective service provider. In his book, he attributes the transformation to one major accomplishment: a change of culture. At the core, that transformation involved a radical alteration of IBM's incentive structure. Gerstner transformed the culture from an inward one focused on process to an outward one focused on the customer. Everything the company did was organized around serving the customer with innovations, urgency, and superior quality. In line with this organization, the incentive structure was changed from entitlements to rewards for meeting customer needs. The change was not easy, as Lou Gerstner states in the introductory quote of this chapter. Yet, incentives are probably the most powerful of the three practices within the reach of top management for effectively establishing a culture for innovation.

Incentives for Enterprise: Google

From its incorporation in September 1998, Google has grown rapidly to become a behemoth with revenues of $29 billion, over 24,000 employees, and a capitalization of $191 billion for year-end 2010. In just eleven years since incorporation, it had grown to become the 39th largest global company by market cap,²⁸ ahead of PepsiCo, HP, Samsung, and Intel. Yet it strives to maintain a spirit of an entrepreneurial start-up. Its core product is search. Many people assume that its success is due to its initial highly innovative search engine, PageRank, based on number of hyperlinks pointing to each site. However, it has remained at the top due to its continuous innovation. Just a few major innovations are AdWords, AdSense, Android, Chrome, Earth, Gmail, Picasa, Desktop, and Docs. Sustaining that innovation is a culture that strives for unrelenting improvement in making information available to consumers at a click. At the root of that culture is a system of incentives for creating new ideas, rewarding innovations, and rewarding enterprise. In particular, Google has generous rewards for success with weak penalties for failures in a multilayered incentive system. That culture has enabled it to stay ahead of its numerous competitors, from large corporations such as Microsoft with deep pockets and massive research to countless entrepreneurs the world over who are striving to develop better products than those of Google.

Perks, Options, and Awards

For starters, in addition to standard fringe benefits, Google provides employees with outstanding perks, including fitness centers, gourmet restaurants, haircuts, laundry, dry cleaning, car washes, massages, and babysitting services on its campus. It also offers generous transportation allowances, commuter buses to and from home, and health and retirement benefits. Google ranks high on graduates' lists of most desirable employers.

Part of motivation for this largesse is Google's flush cash position. However, the explicit motive for these benefits is to attract and retain the best employees and pamper and motivate them to give their best to Google. These perks are also meant to remove all distractions and free up employee time and energy, not just for regular jobs but also to be innovative. Google believes this management philosophy gives it an advantage over its competitors because the company makes it easy for programmers to do what they want, which is to write code. Google's Eric Schmidt and Hal Varian say the goal of the perks is “to strip away everything that gets in their [workers'] way.” They explain, “Let's face it: programmers want to program, they don't want to do their laundry. So we make it easy for them to do both.”²⁹ Google recognizes the added benefit of increased job satisfaction. And the costs of such perks are minimal relative to the benefits of increased productivity, including innovation.

Initially, Google gave its early employees generous stock options, which made them millionaires overnight when the company went public. These employees are nicknamed “economic volunteers” within the company because the profits they reaped after the firm went public made them financially secure for life.³⁰ Even today, Google continues to use its high-priced stock to lure and retain talent.³¹ Initially, Google's salaries were lower than market rates with an emphasis on such stock options. Many start-ups often use this strategy to ease cash flow and incentivize employees to share in the potentially huge rewards of a start-up. However, subsequently, to attract talented engineers, Google has begun increasing salary levels to make them competitive with the rest of the technology industry.³² By early 2007, experienced engineers could earn as much as $130,000 a year, in addition to stock options and shares when they join.³³

Founder's Awards, which run into millions of dollars, are another incentive tool to encourage and recognize employee innovations. For example, Niniane Wang won a million-dollar Founder's Award for an innovative program that searched computer desktops.³⁴ Wang was only 27 years old at the time. Bret Taylor and Jim Norris won a Founder's Award for innovation on Google Maps, again estimated at a million dollars.³⁵

Google's strategy is consistent with research on incentives. For example, a recent study found that talented individuals preferred employment contracts where individual performance was rewarded strongly (with a larger equity component and greater performance-based pay) than employment contracts with weak incentives that pay a “fixed amount reflecting some average level of performance.”³⁶ In the software industry where talent is critical and competition intense, Google's reward structure would be essential to attract, retain, and incentivize talent.

Time Off to Explore: Structure and Fruits of 20% Off

“If you're not failing enough, you're not trying hard enough,” says Richard Holden, product management director for Google's AdWords service. “The stigma [for failure] is less because we staff projects leanly and encourage them to just move, move, move. If it doesn't work, move on.”³⁷

Google places a premium on success but it doesn't punish failure. In fact, engineers at Google can spend 20% of their time working on personal projects unrelated to their primary assignments.³⁸ This mandate is part of Google's package to employees, “a license to pursue dreams.” This mandate has spawned services such as Google News and the social networking site Orkut. “Google is …all about individuals fulfilling or exceeding their potential, and employees are given significant license to foster this,” says Geoffrey Moore.³⁹ Outstanding employee projects have a good chance of developing into commercial products. Google News, Gmail, and Google Finance are the fruits of this program.⁴⁰

The development of Gmail is instructive.⁴¹ A Google user complained about inefficient existing e-mail systems and how she had to spend a great deal of time filing messages or trying to find them.⁴² Alternatively, she had to consistently delete e-mails to ensure she stayed under the usual limit of four megabytes per e-mail account. Frustrated with these limitations, she asked if someone at Google could help fix the problem.⁴³

Paul Buchheit had started work on an e-mail system while he was in college, but never completed the project. Buchheit's college had Internet facilities on campus but, at the time, e-mail was restricted to the user's computer. Buchheit found this policy limiting and realized how much more useful it would be if he could access his e-mail from any computer on campus. He figured if he had a Web-based e-mail account, his information could be online at all times and he would be able to access his data from any location.⁴⁴

When Buchheit joined Google in 1999, he continued to design a method to improve e-mail systems. Fairly quickly, he created a viable Gmail model using existing company technology.⁴⁵ But that was just the beginning of the challenge. Gmail also had to make money and be profitable for the company. Buchheit decided to innovate with a concept which was in existence at the time but not believed viable by most companies: linking ads to the content of an e-mail.⁴⁶

Marissa Mayer was then Google VP of Search Products and User Experience. When Buchheit told her of his idea, she shot it down and asked him not to proceed. She theorized it was easier, like their competitors, to start with limited-storage e-mail accounts and then to charge people for mailboxes with increased megabytes. Buchheit, convinced of the potential of this new product, ignored his supervisor's orders, pursued his research, and completed work on the ad integration component.⁴⁷

When Mayer saw the integration of e-mails and ads she almost shut the project down. Mayer thought the “ads were never going to work” and thought that “target[ing] the ads at [people's] email [was] going to be creepy and weird …and cause privacy concerns.”⁴⁸ However, she held off on asking Buchheit right away to remove this feature from Gmail. During this time, she typed an e-mail about hiking and saw an ad for hiking boots. She also got an e-mail about Al Gore's visit to Google and up popped an ad for books about Gore.⁴⁹ Mayer then realized that she had been mistaken; Buchheit's ad integration concept could be highly profitable for the company. There is some ambiguity about whether AdSense, a Google product that generates multimillion-dollar advertising revenue, arose from or led to this project.⁵⁰

Buchheit completed a personal project he started in college on his own 20% time. His efforts were, at a point, clearly contradictory to what senior management believed was a viable business model. But, instead of reprimanding Buchheit for disregarding orders on the advertising integration, senior management was willing to accept its error and embrace an employee's innovation. When Mayer realized she was wrong and that Buchheit was right, she did not bury his invention, but promptly accepted the new idea, with resounding commercial success for Google. Buchheit was handsomely rewarded for the innovation and retired from Google at age 30.⁵¹

Employee innovation with the 20% time also extends to non-software-related areas. Cari Spivack, who used to work on Google's book-search product, got tired of driving to work in rush hour traffic. She thought of the idea of using a company shuttle that would reduce employees' commutes. Spivack found a bus company and worked out possible routes a shuttle might take. She presented her idea to Google management after she researched it. Google rewarded Spivack's creativity by implementing the idea without having multiple committees conduct feasibility studies.⁵²

The 20% time is a costly program that is difficult to monitor. Google leaves it up to employees to use their 20% time productively. While there are some outstanding successes, a large proportion of such time may well be unproductive. This failure is the cost for a few successful innovations.

Challenge of Talent Retention

Recently, as Google's employee pool has grown huge, some valuable ideas have been lost in the crowd without getting the needed attention and support. Some of these ideas have left the firm together with their creators. Thus, even with strong incentives for innovation, Google loses talent. To prevent such losses, Google established a system of Innovation Reviews.⁵³ The Innovation Review allows employees to present new product ideas to Google top management, including the founders and CEO. It ensures that senior management is aware of and involved in the early development of new ideas. It also ensures that the project receives the money and manpower it needs to result in a commercially viable product for Google.

This policy resulted in the development of several new products, including software for facial recognition to use Microsoft Outlook simultaneously with Google's data storage facilities.⁵⁴ In addition to generating new revenues for the company, the review meetings recognize employee innovations and use company money and manpower to bring the employee's ideas to fruition.

Google's generous incentive system—where employees are relieved from mundane worries, have ample time to pursue their own interests, are rewarded handsomely for productivity, and are not penalized for failure—has consistently led to Google being ranked as one of the best companies for which to work.⁵⁵ More important, it has created an atmosphere where innovation thrives. The wisdom of Google's policy is backed by findings from independent research. For example, research shows that monetary rewards do not deter creativity. However, if the incentives are accompanied by strict guidelines and restrictions on how the work is to be performed, the incentives do have a serious negative impact on creativity.⁵⁶ The open atmosphere of 20% time can therefore strongly promote innovation.

Incentives for Loyalty: General Motors

Through innovations in design, segmentation, and management, General Motors (GM) flourished through the first two-thirds of the last century to become the dominant manufacturer and marketer of automobiles in the world. However, during the last forty years, GM began a steady decline to ultimately bankruptcy in 2009. This decline points to a culture that contrasts with that of Google. A consistent theme in GM's decline is a culture that rewarded longevity rather than enterprise, focused on short-term returns rather than long-term growth, and did not persist through obstacles and failure. On his second visit to Congress in December 2008, GM CEO Rick Wagoner finally confirmed these problems, conceding that “GM has made mistakes in the past.”⁵⁷ Some of these mistakes were not investing in technology for the future, caving in to short-term union demands, and not persisting through errors.

Technology Troubles

GM has frequently, and to its own detriment, refused to take adequate long-term risks with new technology. In its refusal to learn from errors and tolerate the slow and unsure course of innovation and in its shortsighted haste not to fail, it killed the very thing it was seeking—to develop market leadership through breakthrough technology. Over the decades, GM has been unable “to strike a balance between those inside the company who pushed for innovation ahead of the curve and the finance executives who worried more about returns on investment.”⁵⁸ It has spent billions of dollars on innovations like the Saturn and the EV1 electric vehicle but abandoned the projects early because of a seeming lack of immediate profits.

GM's struggle with electric technology is a prime example of its refusal to take risks, learn from errors, and be patient about success. GM engineers started developing electric car technology as early as the 1970s. In 1990 GM exhibited its first prototype of an electric environmentally friendly car, called the Impact, at the Los Angeles Auto Show. The Impact, eventually renamed the EV1 (Electrical Vehicle), was a battery-operated car, which was released in limited markets in 1996. Although the EV1 became popular, in 1999 GM withdrew the car from the market, citing technical concerns and lack of demand. In 2003, GM recalled all EV1s from the market and had most of the cars crushed in the Arizona desert.⁵⁹

The real reason for the demise of the EV1 is controversial. Some outrage over the death of the EV1 spawned the documentary, “Who Killed the Electric Car?”⁶⁰ The documentary blamed, inter alia, GM and the oil lobby. The price of gasoline was low during this time. The documentary alleged a conspiracy between GM and the oil companies, which saw the possibility of declining oil profits if people switched to electric cars.

However, GM attributed the car's demise to its unwillingness to wait for the EV1 to become profitable. Though the electric technology in some form could be profitable in the future, it was not willing to take that risk of uncertain and long-term payoff. In contrast, Toyota did the opposite and pursued hybrid technology (see Chapter 3). John Shook, a manager at a GM-Toyota joint venture plant said, “Toyota is built on trial and error, on admitting you don't know the future, and that you have to experiment. At GM, they say, ‘I'm senior management. There's a right answer, and I'm supposed to know it.’ This makes it harder to try things.”⁶¹

GM also admitted that in subsequent years it did not put enough resources into developing the hybrid car technology.⁶² GM put its fuel-efficient and hybrid technology on hold to focus instead on building large cars with big engines and horsepower, which yielded high profits in the short-term.⁶³ On the one hand, with cheap gas and the popularity of big cars, GM was not willing to risk investments in alternate technologies of the future to secure future markets. On the other hand, Toyota, as well as other Asian automobile companies, looked ahead and developed smaller, cheaper, more fuel-efficient, and hybrid cars. When gas prices eventually went up, GM's big gas guzzling cars were not the vehicles the public wanted.

GM had the opportunity to be a market leader in this segment. Instead, GM lost this race to Toyota. While Toyota's Prius hybrid sold more than 2 million vehicles globally since it hit the market in 2000, GM's Volt hybrid electric entered the market only in 2011. Even then, the Volt was much costlier (estimated $40,000) than the Prius, (estimated at $21,000).⁶⁴

GM regrets killing the EV1 hybrid car. “If we could turn back the hands of time, we could have had the Chevy Volt 10 years earlier,” regretted GM R&D chief Larry Burns.⁶⁵ Just as the EV1 was not immediately profitable, the Volt will not generate profits for a few years. But desperate for a hit and under pressure from the Obama administration, GM is willing to take the risk because it needs the innovations to survive.

Labor and Union Priorities

GM had started with a sound method of incentivizing employees. In 1923, Alfred Sloan, CEO of GM, helped GM employees buy GM stock.⁶⁶ However, over time, GM moved away from such incentives. Tragically, in the 1980s, GM's CEO Roger Smith offered unions very generous retirement benefits to buy peace with the unions over not increasing salaries. The strategy did not affect earnings, because at the time, accounting rules allowed a firm to ignore retirement obligations when computing earnings.⁶⁷ Ultimately, as thousands of employees retired, retirement obligations became an unbearable financial burden. GM bought short-term peace with long-term trouble. It had created a culture of entitlement, similar to the one at the old IBM.

Recent developments underscore how unproductive this culture was. Even when GM was facing possible bankruptcy, it was unable to reduce its costs and its daily cash burn due to agreements signed with the unions decades earlier.⁶⁸ Union agreements prevented GM from shutting down plants or laying workers off without costly penalties. GM factories had to be maintained at a minimum “80% capacity” whether the plant was generating revenues or not.⁶⁹ Even when plants stopped production, GM had to pay all workers that were laid off, including their very expensive medical costs and pensions.⁷⁰ It had a “Jobs Bank” program for this purpose. For example, an employee who was laid off because the employee's division merged with another in 2000 enrolled in the Job Banks program. By 2006 the employee was still not working for GM. But the employee received his or her salary, with benefits, for nearly the entire period since 2000. The cost to GM in 2006 for salary and benefits (with annual increases) for this one employee alone, who had stopped working for the company over six years earlier, was over $100,000!⁷¹

Tragically, all these generous benefits were longevity-based incentives that motivated loyalty but did nothing for stimulating innovation, as research suggests.⁷² Unions favored them because they seemed more equitable than performance-based incentives. Further, these incentives prevented GM from directing much-needed funds into the redesign and updating of its models. These benefits were designed due to a failure to inspire unions to work toward the long-term good of the firm and the employees.⁷³ The incentives were also the result of a deep cultural malaise at GM. John Z. DeLorean, the legendary car innovator and a GM vice president, alleged that starting from the 1960s, GM's management culture evolved to an elite clique. Executives were promoted not on the basis of performance but on how well they supported the status quo.⁷⁴ Managers thwarted DeLorean's efforts to improve the quality of cars by an emphasis on maintaining the existing structure (products, markets, salaries) and short term financial results.⁷⁵ This policy was due to a shortsighted focus on quarterly results instead of innovation for long-term growth. Thus, incentives were designed on rewarding mediocrity in management and not on promoting enterprise.

Recent research bears out the futility of a culture such as GM's. Research shows that if CEOs and senior management are rewarded only on short-term revenues and are penalized for delays in profit, the firm would be jeopardizing its long-term growth.⁷⁶ CEOs may be averse to taking risks necessary for innovation if there is no immediate possibility of profits, thus jeopardizing the firm's development of future markets.⁷⁷ A more successful approach appears to be incentivizing CEOs for creating innovations for long-term growth.⁷⁸

GM's ultimate bankruptcy and government bailout in 2009 was a long time coming. It points to a deep-seated failure to build a culture of innovation. The root cause of this failure was the firm's structuring of rewards to placate unions, support an elite, and achieve short-term accounting profits at the cost of long-term innovation and growth.

Incentives for Innovation: 3M

3M claims it is one of the world's successful new products company. By 2009, its worldwide sales topped $25 billion, with operations in more than sixty countries, and employment over 79,000.⁷⁹ 3M has built a corporate culture highly supportive of innovation that has made it well known for invention and creativity. As Ronald Mitsch, senior vice president of Research and Development at 3M in the 1990s, admitted: “Innovation does not just happen unless you make sure people know it is a top priority and then provide them with enough freedom and resources to make it work.”⁸⁰

3M incentivizes employees in numerous ways. Since 1920, 3M has followed a policy of allowing researchers to spend up to 15% of their time working on projects of their choice. Many successful products, including the Post-it® note, were results of the 15% rule. The 15% rule also benefits researchers because it gives them an opportunity to shape their own careers on projects that interest them.

3M permits a “freedom to fail” policy that does not penalize employees for trying new products and inventions. Its “dual ladder” policy enables technical people to advance up the technical side of the ladder, taking on increased responsibilities for technologies instead of people and budgets. Scientists who are happiest in the lab can remain there without losing pay or recognition and receive promotions on the technical side of the dual ladder.

3M focuses acutely on developing new businesses and markets. It has a goal that 25% of sales must come from products that did not exist five years earlier. It gives “Golden Step Awards” for products that sell $2 million, at a profit, within the first two or three years of national production.

3M's culture of tolerating failure dates almost to the founding of the company.⁸¹ Dick Drew, one of the architects of innovation at the firm, was an engineering school dropout.⁸² One of his first assignments was testing 3M's waterproof sandpaper at the automobile paint shops. He learned of problems body shops were having while painting cars. When the painters tried to remove the protective tape, it would invariably damage the paint job. Drew promised to produce a better, nondrying adhesive tape, even without knowing how to do it.⁸³

His boss asked him to drop the project, reminding him that 3M was an abrasives company and not a tape company.⁸⁴ However, Drew kept at it. Within two years of working on it within the company without approval, Drew developed the Scotch masking tape in 1925.⁸⁵ 3Mers believe that at this point the culture changed at 3M.⁸⁶ 3M decided they were going to tolerate failure and they were not going to discipline someone for doing the right thing.⁸⁷

The same principle resulted in the discovery of the Post-it note. 3M scientist Spencer Silver was looking to invent super glue but instead created a semi-permanent adhesive.⁸⁸ At the time, 3M was not looking for a semi-permanent adhesive and he found no products within 3M that could use his adhesive.⁸⁹ But rather than dispose of the technology because it had no use within the company and reprimand Spencer for wasting time, the technology was stored in the company laboratory and used years later as the basis for the Post-it note.

Five years later, 3M's Art Fry was frustrated by the scrap paper bookmarks that kept falling out of his hymn book and onto the floor during choir rehearsals. Fry decided to make a better bookmark that would stick lightly to paper without tearing the paper when it was removed.⁹⁰

Fry decided to coat the bookmark with Spencer's adhesive. When Fry used the newly conceived bookmark to write messages to his boss, a new idea dawned on him—it was not a bookmark but a note.⁹¹ However, he faced tough problems and marketing resistance within the company toward the product. He used his 15% time for eighteen months to find solutions for the product. Market surveys for the product received lukewarm interest from consumers. 3M managers then conducted a fresh personal sampling of the test Post-it notes and found that 90% of the people who tried the notes would buy them.

Finally in 1980, several years after Fry first conceived the idea, the Post-it note was launched nationally.⁹² The Post-it note team won 3M's Golden Step Award. This award recognizes teams that develop profitable products yielding sales for 3M.⁹³ The team won the award two years in a row in 1981 and 1982. Today, there are more than four hundred Post-it products sold in more than a hundred countries.⁹⁴

This success was facilitated by 3M's tolerance of trial and error in the innovation process. At the outset, Spencer was allowed to create a product which had no commercial value for the company at the time. Spencer spent years showing the product to various departments within 3M but none had use or need for it.⁹⁵ “My discovery was a solution waiting for a problem to solve,” said Spencer.⁹⁶ Five years later, as noted, 3M allowed Fry to use his 15% time for over eighteen months to work on a product that the company did not believe, at the time, had any commercial value. As Fry said, “At 3M we are a bunch of ideas. We never throw an idea away because you never know when someone else may need it.”⁹⁷

Apart from the 15% option and dual career paths, 3M has a number of programs to incentivize innovation. These include:⁹⁸

• Seed capital: money granted to a researcher to further the development of a new idea or technology.
• The Carlton Society Award: “honors employees for outstanding career scientific achievements, their contributions to new technologies or products, and high standards of originality, dedication, and integrity.”⁹⁹
• Circle of Technical Excellence & Innovation Awards: awarded for outstanding “contributions to 3M's technical capabilities.”¹⁰⁰

3M's consistent emphasis on developing new products and markets, strong monetary and nonmonetary incentives for innovation, tolerance of failure, and creation of a separate reward and promotion structure to recognize the nonmanagerial scientists within the organization has made it a world leader in the development of new products and innovation.¹⁰¹

Structuring Team Incentives: IBM's Learning from Online Gamers

Firms that value innovation are finding they have to be innovative about being innovative. For some it means looking outside traditional research models to study and understand ways to promote innovation and creativity amongst employees. For others, implementing policies that encourage and celebrate failure is a step in the practical direction. IBM Research is a case in point.

Recently, IBM Research, in collaboration with Stanford University and the MIT Sloan School of Management, undertook a study of the online multiplayer gaming virtual world to research whether lessons in innovation and leadership could be learned from observing behavior of the online gamers.¹⁰² Unexpectedly, IBM learned some interesting lessons on incentives and risk taking from the gamers.

In online games, much more so than in the real world, IBM found that the incentive systems rewarded players on the willingness to take risks during the game.¹⁰³ In online gaming, risk taking is encouraged and failure is accepted as the cost of doing business. A player was rewarded for enterprise irrespective of the player's age, education level, or position. In the real world, risk taking can be a permanent black mark or career killer.

IBM also found that when incentive systems in online games were openly available to all players, it increased trust and credibility amongst the players. IBM learned that the complexity of the incentive structure was directly affected by the size of the team and the availability of leadership opportunities. For games that needed a guild or team of seventy or eighty people, a complex incentive system was necessary to motivate the team. Whereas, for smaller teams of only twenty or thirty guild members, greater opportunities for leadership were available, and so a less complex incentive structure was necessary for smaller teams than for larger teams.¹⁰⁴ Thus, where opportunities for innovation and enterprise existed, fewer monetary incentives were needed.

In trying to adopt the lessons learned from the online gaming world, IBM researchers found that some elements, such as transparency in incentive structures, were easier to implement in the real world than other elements, such as an inherent tolerance for risk.

Nevertheless, IBM started implementing what it learned from the computer games to address risk taking and failure within the company. It found that allowing employees the space to make mistakes while instilling confidence to try new things far outweighed the risk of failure. The company did so practically by breaking major operations into smaller projects that enabled it to better incentivize employees with leadership roles. The smaller projects also allowed for more failure, because in smaller doses failure was more palatable and affordable.¹⁰⁵

IBM modified its incentive structure to allow time for risk and failure. IBM Research now evaluates its engineers on one- and three-year time frames: one-year for bonus and three-year for rank and salary.¹⁰⁶ The three-year evaluation cycle demonstrates the company's commitment to investing in the early, risky stages of innovation that take years to show results.¹⁰⁷ The three-year time frame also helps compensate for any one bad year.¹⁰⁸ By rewarding employees on dual criteria, IBM encourages employees to undertake riskier long-term innovation projects which they might not have otherwise chosen to do.

IBM was itself innovative in researching the rapidly growing and exceedingly popular world of online gaming to learn how to deal with risk. And its willingness to step outside the box produced some unusual results to help the company improve innovation and creativity.

Conclusion

This chapter highlights the following principles about designing incentives for enterprise.

• Incentives are powerful. They can substantially alter individual and corporate behavior. They are perhaps the strongest organizational practice that drives innovation. They constitute the core practice that firms can control to motivate innovativeness among employees and transform the culture of their organization toward one of innovation.
• Traditional incentives based on seniority, rank, and years of service motivate loyalty but not innovation. They may actually demotivate innovation as innovative or new employees leave and noninnovative or long-time employees stay.
• Incentives for enterprise need to be asymmetric: they should have strong rewards for success with weak penalties for failure. One powerful incentive for innovation is to allow employees a generous fraction of their time to explore their own ideas.
• Perks are incentives. Because young and new talent is often highly motivated and idealistic, offering them generous perks comparable to what senior employees receive can be highly motivating for innovation.
• Failure must be tolerated or even encouraged so long as employees learn from failure. Social penalties, such as shame, should be minimized for failure.
• Monetary (or economic) incentives in the form of salary raises, bonuses, perks, and stock options are strong motivators of performance. Incentives stimulate action along the metrics chosen for evaluation. A mix of metrics avoids perverse response from choosing only one metric. Especially important is choosing metrics that reflect sales from commercialized innovations and long-term growth.
• The psychology of incentives is as important as their economics. Moral and social incentives can be as strong as economic incentives but cost less. Social incentives in the form of praise, employee recognition, awards, and celebrations cost less than economic incentives but could be quite effective. The simple reason for this fact is that most people value the respect, admiration, and esteem of their peers far more than they value money, especially for what one can design with equivalent cost. Moral incentives (appealing to moral values or aspirations) are basically free, but can be powerful. Moral and social incentives thus should always be in the mix with economic incentives.
• Incentives can have negative, unintended effects especially if penalties are strong and participants do not have a fair chance to achieve the positive incentives. Framing incentives as gains is better than framing them as losses.

In sum, incentives are powerful but highly varied. They can be positive, as in honor, or negative, as in shame. They can be tied to success or failure. They can take a variety of forms including monetary, moral, or social. Carelessly designed, they can turn out to be costly and backfire. But skillfully designed they can be quite effective for innovations. Most important, incentives need to be asymmetric, with strong rewards for success and weak penalties for failure.

¹ Gerstner, Lou, Who Says Elephants Can't Dance? (New York: HarperCollins, 2002), 187.

² O'Connor, Gina Colarelli and Christopher M. McDermott, “The Human Side of Radical Innovation,” Journal of Engineering Technology Management, 21 (2004): 11–30.

³ Pfeffer, Jeffrey, “Too Much Management Can Block Innovation,” Stanford GSB News (September 2003). http://www.gsb.stanford.edu/news/research/ob_toomuchmgmt.shtml

⁴ Shah Raj, in a panel discussion, Conference on Innovating in a Global Environment, USC Marshall School of Business, March 2011.

⁵ Amabile, Teresa M., Philips, Goldfarb, and Shereen C. Brackfield, “Social Influences on Creativity; Evaluation, Coaction, and Surveillance,” Creativity Research Journal, 3 (1990): 6–21; Amabile, Teresa M., “Effects of External Evaluation on Artistic Creativity,” Journal of Personality and Social Psychology,'' 37 (1979): 221–233.

⁶ Deci, Edward L., and Richard M. Ryan, Intrinsic Motivation and Self-determination in Human Behavior (New York: Plenum, 1985).

⁷ Manso, Gustavo, “Motivating Innovation,” draft paper, MIT Sloan Business School, February 28, 2009.

⁸ St. Peter, Anthony, The Greatest Quotation of All Time, Xlibris Corporation, 2010, p. 102.

⁹ Jobs, Steve, “You've Got to Find What You Love,” Graduating Address at Stanford University. Palo Alto, California, June 12, 2005.

¹⁰ “The United States of Entrepreneurs,” The Economist (March 12, 2009). http://www.economist.com/node/13216037

¹¹ Jobs, Steve, “Person of the Week,” interview with Diane Sawyer, ABC News (January 29, 1981). http://abcnews.go.com/WN/abcs-world-news-diane-sawyer-person-week-steve/story?id=9699563&page=1

¹² Rediff Interview, “Innovation Best Comes from People Who Know Nothing About the Topic,” Rediff India Abroad (2006). http://www.rediff.com/money/2006/aug/07kodak.htm

¹³ Senor, Dan and Saul Singer, Start-Up Nation, (New York: Twelve, 2009), 20.

¹⁴ Ibid., 32.

¹⁵ Senor and Singer, Start-Up Nation.

¹⁶ Gompers, Paul, Anna Kovner, Josh Lerner, and David S. Scharfstein, “Skill Versus Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs,” working paper 12592, National Bureau of Economic Research, 2006.

¹⁷ Wulf, Julie and Josh Lerner, “Innovation Incentives: Evidence from Corporate R&D,” Social Science Research Network, Working Paper Series, w11944, 2006; Makri, Marianna, Peter J. Lane, and Luis Gomez-Mejia, “CEO Incentives, Innovation, and Performance in Technology-Intensive Firms: A Reconciliation of Outcome and Behavior-Based Incentive Schemes,” Strategic Management Journal, 27 no. 11 (2006): 1057–1080.

¹⁸ Gneezy, Uri and Aldo Rustichini, “A Fine Is a Price,” Journal of Legal Studies, 29, no. 1 (January 2000): 1–17.

¹⁹ Levitt, Steven D. and Stephen J. Dubner, Freakanomics (New York: Morrow, 2005).

²⁰ Frey, Bruno S. and Felix Oberholzer-Gee, “The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out,” American Economic Review, 87, no. 4 (1997): 746–755, Brafman, Ori and Rom Brafman, Sway: The Irresistible Pull of Irrational Behavior (New York: Broadway Business, 2009), 132–135, 141–143.

²¹ Ariely, Dan, Predictably Irrational (New York: HarperCollins, 2008), 86.

²² Jacob, Brian A. and Steven D. Levitt, “Rotten Apples: An Investigation of the Prevalence and Predictors of Teacher Cheating,” Quarterly Journal of Economics, 118, no. 3 (2003): 843–877; Jacob, Brian A. and Steven D. Levitt, “Catching Cheating Teachers: The Results of an Unusual Experiments in Implementing Theory,” Brookings-Wharton Papers on Urban Affairs (Washington, DC: Brookings Institution Press, 2003), 185–209.

²³ Ariely, Predictably Irrational.

²⁴ Gerstner, Who Says Elephants Can't Dance?

²⁵ Ibid.

²⁶ Ibid., 186.

²⁷ Ibid.

²⁸ Dullfo, Anne, “FT Global 500,” Financial Times (2009). http://media.ft.com/cms/8289770e-4c79–11de-a6c5–00144feabdc0.pdf

²⁹ Schmidt, Eric, “Google: Benefits.” http://www.google.com/support/jobs/bin/static.py?page=benefits.html

³⁰ Lashinsky, Adam, “Google Is No. 1: Search and Enjoy,” Fortune, 155, no. 1 (January 10, 2007). http://money.cnn.com/magazines/fortune/fortune_archive/2007/01/22/toc.html

³¹ Vascellaro, Jessica E., “Google Searches for Ways to Keep Big Ideas at Home,” Wall Street Journal, Technology, 253, no. 141 (June 18, 2009): B1–B5.

³² Lashinsky, “Google Is No. 1.”

³³ Ibid.

³⁴ Ibid.

³⁵ Olsen, Stefanie, “From the Googleplex to the Wine Bar,” CNET News, (January 23, 2008). http://news.cnet.com/From-the-Googleplex-to-the-wine-bar/2100–1030_3–6227204.html

³⁶ Zenger, Todd R. and Sergio G. Lazzarini, “Compensating for Innovation: Do Small Firms Offer High-Powered Incentives That Lure Talent and Motivate Effort?” Managerial & Decision Economics, 25, no. 6/7 (2004): 331.

³⁷ Goo, Sara Kehaulani, “Building a ‘Googley’ Workforce,” Washington Post (October 21, 2006).

³⁸ Dickerson, Chad, “The Google Way,” InfoWorld, February 20, 2004.

³⁹ Olsen, Stefanie, “Google vs. Yahoo: Clash of Cultures,” CNET News (June 21, 2005). http://news.cnet.com/Google-vs.-Yahoo-Clash-of-cultures/2100–1024_3–5752928.html

⁴⁰ Lashinsky, “Google Is No. 1.”

⁴¹ Google, “Google Gets the Message, Launches Gmail,” Press Center, Google website, http://www.google.com/press/pressrel/gmail.html

⁴² Google, “Google Gets the Message.”

⁴³ Google, “Google Gets the Message.”

⁴⁴ Katdare, Kaustubh, “Interview with Paul Buchheit—Creator of Gmail, AdSense & FriendFeed,” CrazyEngineers, March 1, 2009. Retrieved on July 20, 2012, from http://www.crazyengineers.com/mr-paul-buchheit-creator-of-gmail-adsense-friendfeed/

⁴⁵ Ibid.

⁴⁶ Ibid.

⁴⁷ Mayer, Marissa, “Innovation, Imagination, Creativity—Google VP of Search Products Tells Story of Gmail,” (October 26, 2007). http://idratherbewriting.com/2007/10/26/innovation-imagination-creativity-google-vp-of-search-products-talks-to-iinovate-podcasters/

⁴⁸ Ibid.

⁴⁹ Ibid.

⁵⁰ Ibid.; Casnocha, B., “Success on the Side,” The American (April 24, 2009).

⁵¹ Lashinsky, “Google Is No. 1.”

⁵² Ibid.

⁵³ Vascellaro, “Google Searches for Ways to Keep Big Ideas at Home.”

⁵⁴ Ibid.

⁵⁵ “100 Best Employers to Work With,” Fortune (February 2, 2009).

⁵⁶ Amabile, Teresa M., “Motivational Synergy: Toward New Conceptualizations of Intrinsic and Extrinsic Motivation in the Workplace,” Human Resource Management Review, 3, no. 3 (1993): 185–201.

⁵⁷ Crowley, Stephen, “At G.M., Innovation Sacrificed to Profits,” The New York Times (December 5, 2008). http://www.nytimes.com/2008/12/06/business/06motors.html?pagewanted=all

⁵⁸ Ibid.

⁵⁹ Taylor, Alex, III, “The Great Electric Car Race,” Fortune, 164, no. 5 (April 14, 2009): 33.

⁶⁰ Sony Pictures, “Who Killed the Electric Car?” (2006).

⁶¹ Levin, Doron and John Helyar, “‘Already Bankrupt’ GM Won't Be Rescued by U.S. Loan,” Bloomberg (December 12, 2008). http://www.bloomberg.com/apps/news?pid=newsarchive&sid=abLGhi7QEIt8

⁶² Ibid.

⁶³ Taylor, “The Great Electric Car Race.”

⁶⁴ Ibid.

⁶⁵ Naughton, Keith and Allan Sloan, “Comin' Through!” Newsweek Web Exclusive, 2007. http://www.thedailybeast.com/newsweek/2007/03/11/comin-through.html

⁶⁶ Stewart, Bennett, “GM's Second Great Crisis,” HBR NOW, blogs.harvardbusiness.org, (May 29, 2009). www.blogs.hbr.org/hbr/hbr-now/2009/05/gms-second-great-crisis.html

⁶⁷ Ibid.

⁶⁸ Welch, David, Dan Beucke, Kathleen Kerwin, Michael Arndt, Brian Hindo, Emily Thornton, David Kiley, and Ian Rowley. “Why GM's Plan Won't Work,” Newsweek (May 9, 2005): 84–93.

⁶⁹ Ibid.

⁷⁰ Ibid.

⁷¹ McCullagh, Declan, “Big Three Bailout? Not So Fast,” CBS, (CNET), (November 12, 2008). http://www.cbsnews.com/2100–503363_162–4595068.html

⁷² Zenger, Todd R. and Sergio G. Lazzarini, “Compensating for Innovation,” Managerial & Decision Economics, 25, no. 6/7 (September-November, 2004), 329–345.

⁷³ Welch et al., “Why GM's Plan Won't Work.”

⁷⁴ “Why General Motors Failed,” Examiner, April 17, 2009.

⁷⁵ Wright, Patrick J. and John Z. DeLorean, On a Clear Day You Can See General Motors: John Z. DeLorean's Look Inside the Automotive Giant (Portland, OR: Wright Enterprises, 1979).

⁷⁶ Rajagopalan, Nandini, “Strategic Orientations, Incentive Plan Adoptions, and Firm Performance: Evidence from Electric Utility Firms,” Strategic Management Journal, 18, no. 10 (1997): 761–785.

⁷⁷ Ibid.

⁷⁸ Makri, Marianna, Peter J. Lane, and Luis R. Gomez-Mejia, “CEO Incentives, Innovation, and Performance in Technology-Intensive Firms: A Reconciliation of Outcome and Behavior-Based Incentive Schemes,” Strategic Management Journal, 27, no. 11 (2006): 1057–1080.

⁷⁹ “Who We Are,” 3M Company. http://solutions.3m.com/wps/portal/3M/en_US/3M-Company/Information/AboutUs/WhoWeAre/

⁸⁰ Mitsch, Ronald A., “Three Roads to Innovation,” Journal of Business Strategy, 11, no. 5 (1990): 18–21.

⁸¹ Maiello, Michael, “Koulopolous on Innovation,” Business Visionaries, Forbes (June 2, 2009).

⁸² “A Century of Innovation, The 3M Story,” 3M Company. (2002), 15–16. http://multimedia.3m.com/mws/mediawebserver?77777XxamfIVO&Wwo_Pw5_W7HYxTHfxajYv7HYv7H777777—

⁸³ Ibid.

⁸⁴ Ibid.

⁸⁵ Ibid.

⁸⁶ Maiello, “Koulopolous on Innovation.”

⁸⁷ Ibid.

⁸⁸ “A Century of Innovation, The 3M Story,” 38, 40.

⁸⁹ Ibid.

⁹⁰ Ibid.

⁹¹ Ibid.

⁹² “A Century of Innovation, The 3M Story,” 40.

⁹³ Ibid.

⁹⁴ “A Century of Innovation, The 3M Story,” 38.

⁹⁵ Ibid.

⁹⁶ Ibid.

⁹⁷ Ibid.

⁹⁸ “3M—Where Innovation Rules,” Editorial, R&D Magazine. http://www.rdmag.com/default.aspx?rid=362

⁹⁹ Ibid.

¹⁰⁰ Ibid.

¹⁰¹ Ibid.

¹⁰² “Virtual Worlds, Real Leaders: Online Games Put the Future of Business Leadership on Display,” A Global Innovation Outlook 2.0 Report, International Business Machines Corporation, 2007. http://www.seriosity.com/downloads/GIO_PDF_web.pdf

¹⁰³ Ibid.

¹⁰⁴ Ibid.

¹⁰⁵ Ibid.

¹⁰⁶ Garcia, Armando, “How Failure Breeds Success,” Business Week, 3992 (July 10, 2006): 42–52.

¹⁰⁷ Ibid.

¹⁰⁸ Ibid.