Can Incentives Help You Productize?
One CEO recently shared with me, “We need to restructure our incentive plan. Our consultants are all incented on short-term revenue, which is making it very hard to get traction with our new products that have lower price points but better margins and more revenue visibility.”
Aligning performance measures and incentives with an organization’s growth strategy is, surprisingly, an often overlooked tactic for change. As the anecdote above suggests, leaders who are trying to innovate and develop more scalable products and services often need to also reshape the organization’s people-related practices like performance measures, incentives, training and operational freedom. Among these, performance measures and incentives can be especially tricky to change because when they are not implemented in the right ways, they can actually inhibit rather than promote the new product innovation behaviors you are trying to foster.
In this article, I describe how the right kind of performance measures and incentives can support a new product innovation strategy, while still protecting the core business. I start by outlining two principles that help leaders reframe incentives and end by offering a list of common incentives that help support new product innovation and launch. I discuss:
Reframing incentives to reward behaviors, not just results.
Tailoring performance measures.
Using common incentives that have helped our clients embrace the risks that accompany new product innovation.
Reframing Incentives: Reward Behaviors, Not Just Results
Many business leaders establish incentive structures based on the results they want to see. By incentivizing results, leaders often imagine that they promote the behaviors that will lead to those results. But this isn’t always the case. Organizations that are successful in pursuing a new product innovation growth strategy embrace behaviors such as discovery, speed, and collaboration, and they find ways to incentivize them.
Innovation thrives in an environment where an individual is not only allowed to fail and learn from failure but is incentivized to do so. In his research on innovative companies, Gerard Tellis, author of Unrelenting Innovation, found that the best incentives for innovation include “strong incentives for successful innovation but weak penalties for failure” (144). Tellis interviewed Jeffrey Pfeffer of the Stanford School of Business, who agrees that incentives can be used to encourage discovery and failure, arguing that if companies want to support innovation, they “have to build a forgiveness culture, one in which people are not punished for trying new things” (144). Incenting discovery will reward employees for taking risks in the spirit of discovery and approaching failure as a way to learn.
One way to do this is to measure learning rates for individual employees or teams and reward them for developing hypotheses and testing them. Rewarding employees and teams based on how much they learn rather than how much they succeed tells them that your organization values discoveries and the curiosity it takes to understand your customers and their needs.
When your organization’s immediate goals include turning tacit knowledge and informal processes or methodologies into a scalable product or productized service, it will be essential to tie incentives to knowledge sharing and collaboration. Tellis describes the case of Infosys, the information technology outsourcing company, and their journey from offering customized services to developing scalable software products. A big part of this journey was incentivizing their software engineers to document processes in a way that would save time and allow developers to reuse code modules. Incentivizing collaboration can support work within or across groups within your organization and can be crucial to facilitate knowledge sharing.
As you consider the behaviors you want to reward, it’s important to remember that structures that reward one behavior are also likely to disincentivize another. For example, if incentives are tied to longevity or seniority, they may be promoting loyalty, which tends to limit, rather than encourage, the kind of speed and risk-taking that supports product innovation.
Tailoring Performance Measures
When using incentives to support a productization strategy, it’s important to ensure appropriate performance measures. I advise clients to consider the following:
1) Choose measures that are designed for products.
When you transition from a business model that is primarily services to one that also includes products, it can be easy to rely on service-focused performance measures that are familiar. However, performance measures designed for services should not be used for products. Measures such as utilization rates or short-term revenue will work against the innovative behaviors you need to foster in a product-friendly culture.
2) Think about the maturity stage of your product(s).
Your performance measures should reflect the products’ maturity stage. The measures that will work for new products are often not the best measures for established products. It’s important, for example, to be sure to measure new products based on learning cycles, customers or usage, not on profitability.
Using Common and Effective Incentives:
So what incentives have been known to support new product innovation behaviors? I’ve collected a list of successful incentives you might consider adopting to make your organization more product-friendly.
- Social Incentives foster a feeling of group pride or raise the visibility of the behaviors you want employees to demonstrate. Adopting social incentives could be as simple as:
- Making a point to publicly praise the efforts of one individual or team at each staff meeting or other expressions of gratitude. (link to Gratitude Blog)
- Measuring and reporting on time spent on new product development as a way to bring visibility to it
- Celebrating failure by making it part of your weekly meetings. For example, everyone is expected to share at least one story of failing and learning from it. One organization leader said their company came to see that they might not be trying hard enough if they didn’t have a failure story to share.
- Moral Incentives work by motivating the employees to do good within or on behalf of the organization.
- Sharing stories of client success with the company’s product is one of the best ways to create moral incentives. In a recent conversation, the Head of Product for a global HR consulting firm highlighted this: “The best thing you can do with a consultant is to show them how a client used their product and found success. Consultants care about the client.”
- Monetary Incentives provide financial benefits to the employee; while these can sometimes be tied to employee compensation, they can also be connected to monetary rewards that invest in further innovation to bring ideas to scale.
- Providing incentives that support product exploration can be an essential way to support your productization goals. For example, offering small stipends to employees to explore peripheral market opportunities is an excellent example of how you can invest in innovation relatively inexpensively.
- Creating a contest can motivate employees to share or pursue innovation in new ways. One organization leader explained that they created a quarterly contest inviting folks to submit their biggest failure and describe what they learned. Peers voted for the winner, who received $1000.
- Rethinking commissions or bonuses can be helpful as you redirect employees from activities with short-term impacts to those with long-term gains. Sometimes, this means creating explicitly higher incentives for the behaviors you want to see. For example, changing sales commissions to payout a lower percentage on non-scalable consulting and a higher percentage on subscription product sales to “move” employees in the right direction.
I’m surprised at how frequently organizations forget to adjust their performance measures and incentives when pursuing a standardization strategy and new product innovation. If you want to discuss how we can support you in creating a more product-friendly culture at your organization, please contact Nicole Merrill.