July 28, 2011

Whenever I give a speech on creativity and innovation in business I never fail to field some version of this question: "What's the best way to incentivize people for ideas?" My answer is, "You don't. Never ever pay people for ideas. Your current idea flow will stop cold." Here's why.

Consider this: combined research from the U.S. Employee Involvement Association and the Japan Human Relations Association reveals that the average number of ideas submitted per employee annually is an average of 100 times greater in Japanese companies than in U.S. companies. Companies like Toshiba, Sony and Toyota average over a million implemented ideas each year. Mostly small incremental improvements, but the cumulative effect is impressive.

Why is the gap so huge? I maintain that we reward the wrong thing in the wrong way. The average reward in Japanese companies is worth barely five dollars, and it's not given in cash. More likely it's small gift, or simple recognition. That's over 100 times less than the average U.S. financial reward of nearly $500 for an accepted idea. Now look at those numbers. We're paying 100 times more for 100 times less. We have it backwards! The bottom line is that the Western business practice of rewarding only accepted ideas has all but killed the creative drive in many American businesses.

In many Japanese companies, it's all about idea submission, not idea acceptance. This highlights why Eastern and Western beliefs regarding the role that monetary reward plays in idea generation are so opposite. But the research is clear that payment for ideas defeats the purpose, which should be as it is in a startup: participation by everyone in the company. But once a company gets beyond a certain size, the pay-for-ideas mindset kicks in.

The situation brings to mind one of my favorite parables, which makes the point quite well:

An old woman lived alone on a street where boys played noisily every afternoon. One day, the din became too much, and she called the boys into her house. She told them she liked to listen to them play, but her hearing was failing and she could no longer hear their games. She asked them to come around each day and play noisily in front of her house. If they did, she would give them each a quarter. The youngsters raced back the following day, and they made a tremendous racket playing happily in front of the house. The old woman paid and asked them to return the next day. Again they played and made noise, and again she paid them for it. The old woman paid and asked them to return the next day. And so they did, joyfully and noisily playing to their hearts' content. But this time she gave each boy only 20 cents, explaining that she was running out of money. On the following day, they got only 15 cents each. Furthermore, the old woman told them she would have to reduce the fee to a nickel on the fourth day. The boys then became angry and said they would not be back. It was not worth the effort, they said, to play for only a nickel a day.

The fable should ring a familiar bell. The old woman’s scheme effectively stole from the boys the very thing they loved most to do, what they were in fact doing freely without a thought of payment. The moral of the story is pretty clear. If we’re not careful, we can replace a natural motivation with a synthetic one, one that in the end is not sustainable. We can quite easily rob creative power from people by attaching a financial reward to ideas.

The story repeats itself all the time. I've seen more than a few companies—of all sizes in many different industries—treat employees like a rat in a maze after cheese, by paying for approved ideas and accepted suggestions. They then wonder why they get such low participation. They give no thought to the notion that in order to get a good idea, you need a lot of ideas.

I constantly take my daughter's elementary school teachers to task, because they are notorious for the practice. They want students to read more books, so they reward the completion of books. Maybe with a homework exemption. Or extra credit. Or even vouchers to the local Taco Bell. So the quick and easy books get read. The superficial books get read. Even the good readers, the ones who love to read, get swept up in the program. They stop reading the classics, turning to the quick reads to score points. Then the program is discontinued, and everyone stops reading. Even the best readers lose their love of words. And that’s a true shame.

In the end, the question of how to incentivize people for ideas is the wrong question. The right question is: how do we draw out the natural curiosity and creativity within people and guide it toward adding value for customers?

My answer: do not attempt to light a fire under people. Light the fire within them.

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