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Incentivizing innovation: How family firms prepare for the future
Family-owned businesses, be they modernizers or guardians of their past, can be successful innovators – providing they can assemble an appropriate package of incentives.
A general principle of innovation is that doing new things requires breaking with the past. Family firms, often characterized as resistant to change, are so often regarded as an unlikely source of new products, processes, or skills.
Such views are mistaken, however, as an increasing body of recent research has shown. Indeed, not only are family firms heterogeneous, ranging from multinational conglomerates in Asian metropolises to mom-and-pop stores in small-town America, but many of them are among the world’s most innovative firms. In Europe, for example, more than half of Europe’s most innovative firms are controlled by families.
Moreover, as much recent research has shown, it is not just “modernizers” – family businesses that have cut their ties with the past – that have found new ways of thriving. Many of those who have maintained themselves as “guardians of the past” and are actively looking to protect their traditional values and approaches to doing things have also proven themselves to be powerful innovators.
To find out more about how firms from both schools could be successful innovators, we decided to examine them from a human resources management (HRM) perspective, looking at the incentives they used to motivate their employees toward innovation. To guide us, we set out to find the answers to three questions:
1) What configurations of incentives are used to motivate employees at family firms with a successful record of innovation?
2) How do these configurations vary between modernizers and guardians of tradition?
3) Are some configurations used more widely than others?
Project background
For our project, we collected information from a three-year period (2015–2017) for 85 German family-run manufacturers in three industries: motor vehicle parts and accessories, measuring, testing, and navigation instruments, and medical instruments.
Our data allowed us to determine which firms had developed successful innovations according to the number of patents they had filed, which were modernizers and which were guardians, and how their staff viewed important work-related matters such as opportunities for career progression.
We then cross-referenced the human resource strategies adopted by these businesses to see if there were any correlations between innovative firms and the HR approaches they used. For this, we divided the approaches into three “calculative” ones based around “hard” matters such as pay or contracts, and three “collaborative” ones using “soft” techniques such as involvement in decision-making or policies that supported work-life balance (for a list of the approaches used, see “The right carrots”).
The right carrots
Calculative incentives
Salary
Overall satisfaction of employees with salary and additional social benefits, like pension schemes.
Pay-for-performance
Degree to which a firm pays contractually agreed financial rewards for high innovation performance.
Contractual work hours
Degree to which a firm contractually defines a specific amount of work hours.
Collaborative incentives
Opportunities for growth
Employees’ perceived career opportunities in the firm.
Participation in decision-making
Employees’ perceived involvement in the firm’s decision processes.
Work-life balance
Employees’ perceived support for work-life balance.
Findings
Our findings point to modernizers and guardians, with one exception, having different pathways to innovation. For guardians, the key was directing their attention toward collaborative incentives that support participation, flexibility, and work-life balance, while for modernizers, calculative-based incentives were more important, though usually in combination with a collaborative measure.
Specifically, we identified four different paths to innovation for family firms: two used only by modernizers, one used only by guardians, and one shared by both modernizers and guardians.
Both modernizers and guardians each had one configuration which stood out as the most prevalent. For 43% of the modernizers we surveyed, it was “compensated engagement” – combining higher salaries with participation in decision-making, while for 49% of guardians, it was a focus on “people” practices – involving staff in decision-making and supporting a strong work-life balance.
The second configuration of our modernizers, used by 8% of those we surveyed, was a purely calculative “employee transaction” approach, combining higher salaries with contractual work hours.
The configuration shared by both modernizers (6% of our sample) and guardians (18%) was “professional boundaries” – offering a combination of calculative-based contractual work hours with collaborative-based support for work-life balance.
Our findings also revealed the line between success and failure is thin. While the incentive packages used by innovative family firms are different from those used by family firms that lack innovation, even apparently minor changes can make a major difference. For example, as noted above, while modernizers offering a package of higher salaries and contractual work hours were successful innovators, those who combined this package with support for work-life balance were not.
In terms of our three questions, it is clear that family firms use both calculative- and collaborative-based incentives to promote innovation. The specific set of incentives necessary for innovation is principally driven by whether a firm is a modernizer, where the vast majority achieved innovation by combining calculative- and collaborative-based incentives – or a guardian, which is best served by utilizing incentives that support participation, flexibility, and work-life balance.
“Extending our findings beyond family firms suggests that businesses with a more conservative culture and long-established strategies would likely benefit from predominantly collaborative-based incentives, whereas those with a more contemporary culture and evolving strategies would likely benefit from a blend of calculative- and collaborative-based incentives. ”
Finally, we were able to see exactly which configurations of incentives were most commonly used by innovators. For guardians, it was a collaborative-based HRM approach, where participation and work-life balance are promoted to incentivize employees toward innovation. For modernizers, it was combining salary and participation in decision-making.
We also discovered the importance of a minimalistic approach in incentivizing employees toward innovation, as the presence and absence of incentives were found to characterize the configurations. A judicious and directed approach in offering incentives is necessary to foster innovation since an abundance of incentives not aligned with a firm’s culture may fail to motivate employees to direct their behavior toward innovation.
Caveats
Of course, various caveats need to be attached to our findings. As our study examined a sample of family firms from Germany operating in an industry with highly developed policies for innovation, we should be wary of generalizing to other institutional settings.
Also, as our study focused on patents, it didn’t distinguish between different types of innovation, such as radical versus incremental innovation, continuous versus discontinuous innovation, or process versus product innovation. Future research should examine if and how our identified mechanisms and incentive configurations change when different types of innovation are considered.
Nonetheless, overall, our study offers a richer understanding of why family firms strongly attached to tradition and those that are more forward-looking can both be innovative – providing their HRM policies are built on clearly focused and pronounced incentive strategies that complement the nature of their respective views of tradition.
Extending our findings beyond family firms suggests that businesses with a more conservative culture and long-established strategies would likely benefit from predominantly collaborative-based incentives, whereas those with a more contemporary culture and evolving strategies would likely benefit from a blend of calculative- and collaborative-based incentives.
Our insights can also inform policymakers seeking to support firms in their innovation activities – highlighting the importance of being aware that there are various different configurations of incentives that can promote innovation, but those configurations have to be aligned with a firm’s organizational culture.
Adapted from “Employee Incentives and Family Firm Innovation: A Configurational Approach,” by Elisa Villani, Christian Linder, Alfredo De Massis, and Kimberly A. Eddleston, accepted for publication in the Journal of Management.
Authors
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