Hack:
compensating product innovation risk

By Gavin Daniels

September 19, 2010 at 11:55am

Summary

Everyone has read about IBM's solution to innovation via an "incubator" under Lou Gestner and P&G's strategy to use smaller outside partners for innovation as detailed in AG Lafley's book "The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation."

Problem

Larger companies have embraced the concept of product innovation from outside the firm, however not all firms have the resources to manage this outside of the business units. Scrutiny from Wall St. analysts on corporate overhead can discourage the creation of innovation incubators.

Most business units have a general manager that is compensated for his or her current P&L. These GMs are rotated every two-to-three years. Undertaking a costly product development program that will be commercialized after their rotation has a negative impact on their P&L via R&D expenses. GMs are incentivized instead to chase after short-term product wins, often following the competition.

Solution

Why not change the compensation struture for GMs to a structure that rewards for long-term payouts of their short-to-medium-term investments? Why not do what Semco did and create an internal market for new ideas with liquid equities that can be traded? If a corporate budget for product innovation outside the SBUs cannot be created, GMs need to be incentivized for investing wisely in projects with variable lead times to commercialization.

I propose a compensation structure where a GM's total comp reflects the number of years as a general manager combined with the success of the product innovation pipeline which they previously managed. This structure will address the tenure of GMs and take into account that they did not oversee the entire development of new products. It is not a simple solution, but it will discourage the abandonment of product innovation just to hit current year P&L targets.

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September 21, 2010 at 11:29pm

Akash Sah

Maybe the bonus payouts should be accrued and paid if goals are met on a long term basis. For instance, if a GM meets the goal for this year, then s/he gets 25% of the bonus with rest of the payout in subsequent years based on a pre-determined plan.