How Performance Incentives Shape Individual Exploration and Exploitation: Evidence from Microdata

Abstract

The existing literature has highlighted the role of individuals in exploration and exploitation, yet our understanding of what shapes those activities at the individual level remains limited. We integrate the literatures on exploration/exploitation and incentives to examine how incentives impact individual behavior to explore new ideas or exploit existing ideas. Using novel microdata on the commercial projects of sales employees at a South Korean e-commerce firm, we find that individuals engage in relatively more exploration when performance-based incentives are weakened; yet, interestingly, this increase in exploration is driven mainly by high-performing individuals in our setting. Weakening performance-based incentives also lead to higher exploration performance via experiential learning, especially for individuals who work in complex task environments. Overall, this study contributes to the literature on exploration/exploitation by examining how individual exploration and exploitation behavior and performance is shaped by incentives. We also contribute to the incentives literature by investigating the implications of incentives in an important domain, namely, that of knowledge exploration behavior. This study also provides insights into important individual-level microfoundations of firm capabilities and performance by highlighting the important role of individuals in exploration/exploitation activities and how this role is contextualized by the incentives a firm deploys.