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C an your business get more creative bang for its buck? Researcher Victor Cui, assistant professor in business strategy at the I.H. Asper School of Business, set out to answer that question. In 2011, Canadian businesses invested about $15.5 billion in R&D. Since about two-thirds of that money went to personnel, Cui and his colleagues wanted to find out if it was being efficiently converted into innovation. Perhaps more importantly, they wondered if pay strategies could be tweaked to boost creativity. Armed with extensive compensation data from technology giants including IBM, Intel, Google and Microsoft, the researchers looked at whether horizontal pay dispersion — paying some employees more than their peers — influenced innovation. The data covers base pay, bonuses and short and long-term incentives from 1994 to 2002, and the researchers measured innovation performance based on patent productivity. Cui says one stream of research posits that pay dispersion can motivate and retain star employees and weed out unproductive ones, who tend to leave if they feel they're not being paid fairly. But there are problems with that theory. When turnover is high, companies lose the knowledge development that's shared by long-term employees. Pay inequity saps motivation, and workers not only withhold their services, they tend to withhold knowledge from more well-paid peers. "We were looking for some compensation tools to increase performance, but surprisingly found this pay-for-performance system negatively affected innovation," Cui says. Recent research shows the assumption that companies can measure employee performance accurately is faulty. And while pay dispersion may help to attract and retain star researchers, non-star researchers won't collaborate with them. "To generate innovation, or to create new knowledge, it's critically important for the employees to collaborate with each other," Cui says. "Rarely is a patent invented by one single inventor; you have to work in a team." Cui says the impact of horizontal pay dispersion is mitigated when companies have some financial flexibility and employees can anticipate an opportunity to increase their future earnings. But if a company is downsizing and there's no expectation of a raise, it creates competitive tension. And when employees feel they're competing for a piece of the financial pie, the negative impact is increased. Lesser-paid employees think, " 'I'm not going to share any knowledge with you. If I share knowledge with you I lose my knowledge advantage.' " Some compensation strategies do increase motivation. Pay dispersion works well on a vertical scale – when managers have bigger pay packages, employees may aspire to a higher office, for example. Profit-sharing is a good strategy as well, because it aligns employeremployee interests. Workers are motivated to maximize profits and they're more likely to work for the benefit of the company. prof. victor Cui says when it comes to sparking innovation, a fair compensation strategy is best. Photo courtesy of I.H. Asper School of Business Cui and his colleagues studied long-term incentives such as stock options to see if they had a similar effect. Surprisingly, they found that in an R&D context, stock options actually had a negative impact. Employees see stock options as a reward, rather than a carrot that's tied to future performance. "It's counterintuitive, but it's not an incentive — it's a bonus based on their prior performance." Cui says there are a lot of practical implications for this line of research. The economic climate means more companies have limited resources to spend on salaries. But if they can create a positive perspective, employees who believe there's a bright future for the company will invest in that future. The same idea holds true for society at large. Just as pay inequity can create a dysfunctional workplace, societal economic inequality sparks dysfunctional behaviours. "Our findings actually highlight the importance of developing and maintaining a positive perspective of the future among our citizens, which can help them to rebuild the social capital which is needed to overcome economic downturn," Cui says. "One of the things I have to emphasize here is that fairness is super important, because we are human beings and one of the things that everybody cares a lot about is equity." "to generate innovation, or to Create new knowledge, it's CritiCally important for the employees to Collaborate with eaCh other. rarely is a patent invented by one single inventor; you have to work in a team." WINTER 2013 'peg biz | 21

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