Innovation and the element of risk

The idea persists that the only way to generate growth fuelled by innovation is to invest in R&D. However, those companies that are winning, first and foremost, have developed cultures where innovation is seen as everyone’s responsibility. Robert Bolton, Partner in KPMG’s HR Global Centre of Excellence.

Organisations with a culture that encourages and rewards the drive towards innovation, and does not penalise failure resulting from controlled risk taking, are succeeding. Why? Because recognition of the role played by culture in driving success through innovation shifts the focus on people and human capital.

Unleashing the potential within the human capital of an organisation, in turn, requires consideration of how to engage, incentivise and reward individuals and teams in pursuit of the next game changing idea. In this context, performance management clearly plays a vital role. On the one hand this is great news for HR as this is a clear opportunity to position themselves as vital facilitators of, or indeed drivers of, the changes required to bring about a culture of innovation. On the other hand the spotlight is now on HR to finely tune processes and structures to adequately, consistently and transparently incentivise innovation activities and outcomes.

When setting out to optimise performance management processes to drive the right sort of behaviour, HR must make a call as to the degree of risk taking that it wants to encourage. So let’s take a look at some of the considerations: In many cases, although not in all, innovation will be the result of determined team effort. Many performance management systems, however, are geared towards an assessment of the performance of an individual. When setting processes and allocating budgets HR must balance this tension and in line with the preferred cultural ethos of the organisation incentivise and reward the individual and team effort appropriately. Indeed, anyone who has seen the TED lecture by Daniel Pink on incentivising individual performance might conclude that organisations should dispense with individual incentivisation in its entirety. This is particularly the case for organisations that are knowledge based and seek to encourage growth through innovation.

Not all innovation activities result in positive outcomes. In order to position itself as a true champion of innovation, HR must take the necessary steps to ensure that an unsuccessful attempt at innovation, essentially the controlled risk taking, is not met with blame and penalties. It must be okay to fail and in a transparent way this needs to be reflected in incentives, bonuses, year-end reviews and other tangible mechanisms that HR delivers within the realms of performance management. An easy exchange of ideas across boundaries and functions plays a key role in driving innovation. From an organisational design point of view HR needs to consider how it can facilitate such an exchange. Beyond organisational design, however - and perhaps most crucially - HR must find a way of ensuring that budgets allocated for the incentivising and rewarding of innovation activities are not solely ring fenced by function. A truly multi-functional team, spanning organisational boundaries, which drives innovation activities, must see the importance of that reflected in processes, decision making and outcomes of their performance and reward discussions.

It is unlikely that business leaders’ current eagerness to develop a culture of continuous innovation will abate anytime soon. HR plays a crucial role in building innovation into the way people at all levels think and work every day. Within the context of incentivising and rewarding the right type of innovation activities, HR holds a number of levers. When considering any manipulation of these, HR must make a finely tuned call on how best to allocate funds and budgets, in such a way as to incentivise controlled risk taking for the benefit of business growth. In particular, if the aim of the reward is to incentivise risk taking then the best way to drive the incentivisation budget is to establish a gain-share arrangement at the outset so that the thresholds, multipliers and caps are known in advance.

In short, everyone knows what has to be achieved and the budget is driven by pre-determined rules that are, in turn driven by the economics that make sense in light of the business challenge. In summary, when looking to incentivise risk taking, consider the following principles: focus on teams rather than individuals; use a pre-determined gain-share formula and focus on risk in relation to innovation in all its guises. Especially innovation that occurs across organisational boundaries.

Created on: 21-Mar-14 10:29
By: Robert Bolton, Partner - KPMG’s HR Global Centre of Excellence

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