Designing long-term incentives that promote innovation instead of value capture

Abstract

AbstractMajor projects share at least two common challenges with corporations pursuing innovation: the need to coordinate many complementary constituents and the temporal separation between upfront costs and future benefits. In the corporate context, high-powered incentives such as stock options have been popularized as a way to reward executives for successfully navigating these challenges. However, research shows that these high-powered incentives can have hidden negative effects, such that options have a negligible net impact on promoting innovation. Yet few alternatives for promoting innovation have been designed, allowing stock options and other high-powered incentives to remain common in the belief they are the best available approach. This article uses the parallels between the corporate context and major projects to draw implications for regulatory policy-makers to obtain more favourable outcomes.