Balancing incremental and radical innovation through performance measurement and incentivization

Abstract

The literature has discussed the introduction of incentive structures as a means of achieving a balance between organizational exploration and exploitation. This study posits that this is not a reasonable approach to achieving such a balance. I used a micro-economic model where the explorative and exploitative activities are modeled in accordance with the definitions in March (1991). This model shows that the personal cost to the employee of performing activities was a crucial factor in determining their balancing of resources between exploration and exploitation. However, these personal costs are also the Achilles' heel of such balance calculations because information regarding this type of cost is incomplete and difficult, perhaps even impossible, for the owner or manager to obtain. Based on this and the process and output characteristics of exploratory activities, I argue that it is not appropriate to design a hard, quantitative performance measurement and incentive system to balance resource allocation between explorative and exploitative activities. The study shows that the solution to achieving such a balance must be found outside of the incentive system. Further, I posit that managing R&D departments requires the management to focus on enforcing productive workspaces and norms and not on performance measurement and associated disbursal of rewards/punishments.