Motivating Innovation

Motivating Innovation

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Article ID: iaor201112091
Volume: 66
Issue: 5
Start Page Number: 1823
End Page Number: 1860
Publication Date: Oct 2011
Journal: The Journal of Finance
Authors:
Keywords: options
Abstract:

Motivating innovation is important in many incentive problems. This paper shows that the optimal innovation‐motivating incentive scheme exhibits substantial tolerance (or even reward) for early failure and reward for long‐term success. Moreover, commitment to a long‐term compensation plan, job security, and timely feedback on performance are essential to motivate innovation. In the context of managerial compensation, the optimal innovation‐motivating incentive scheme can be implemented via a combination of stock options with long vesting periods, option repricing, golden parachutes, and managerial entrenchment.

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