Crowding‐out or crowding‐in? Direct voice, performance‐related pay, and organizational innovation in European firms

Abstract

Building on motivation crowding theory (MCT), this article contributes to the human resources management (HRM)‐innovation debate by examining the potential trade‐offs between HRM practices targeted to increase employees' intrinsic motivation, such as direct employee voice (EV), and the presence of extrinsic incentives in the form of individual and collective performance‐related pay (PRP). The results of the analysis on more than 22,000 European establishments show support for the positive relationship between EV and a firm's organizational innovation, and that this relationship is weaker in companies that adopted individual PRP schemes (piece‐rate plans). Moreover, while we found that collective PRP (profit‐sharing) does not moderate the relationship between EV and organizational innovation, a positive and significant moderation effect emerged when the combined presence of individual and collective PRP was considered. By advocating that the coexistence of multiple forms of PRP could overcome the crowding‐out effect of individual PRP on EV, the study contributes to the HRM debate by also calling for a better understanding of the potential contingencies between different HRM practices when innovation is focus of the analysis.

Pay incentives, human capital and firm innovation in smaller firms

“…group-bonus or profit-sharing) PRP schemes positively influence a firm’s propensity for product and process innovation. These findings support previous studies suggesting that pay incentives should be considered among the most relevant strategic HRM practices in smaller contexts (Balkin, 1988; Hayton, 2005; Heneman et al, 2000; Way, 2002), and contrast existing evidence on large firms showing that individual PRP may be detrimental to innovation (De Spiegelaere et al, 2018; Della Torre, et al, 2020). One reason for the relevance of PRP schemes in SMEs relates to the differences that typically characterise their pay systems compared to those of larger firms.…”

“…For collective PRP , we created an index ranging from 0 to 2 based on the presence (0 = no; 1 = yes) of ‘variable extra pay linked to the performance of the team, working group, or department’ and/or ‘variable extra pay linked to the results of the company or establishment (profit-sharing scheme)’. The use of dummies to assess the presence/absence of different forms of PRP is common in the compensation literature (Curran and Walsworth, 2014; De Spiegelaere et al, 2018; Della Torre et al, 2020) and SME research (Patel and Conklin, 2012; Sels et al, 2006; Way, 2002). Specifically, Patel and Conklin (2012) argued that, because SMEs lack infrastructures and formal procedures for HR, it is difficult to clearly understand the usage and assess the effectiveness of individual practices and thus, ‘a continuous scale for each practice may be less valid and reliable than a binary coding approach’ (p. 216).…”

“…For example, research shows that individual PRP weakens the positive relationship between task-level resources and innovative work behaviour (De Spiegelaere et al, 2018), and while it may increase extrinsic motivation (i.e. workers effort), it has negative or insignificant effects on intrinsic motivation (Della Torre et al, 2020;Kuvaas et al, 2016), which is essential for employees' creativity and innovation (Amabile, 1996;Amabile and Pillemer, 2012).…”

“…Most importantly, the types of PRP considered may be highly relevant. Depending on the nature of the incentive, employees may react differently in terms of motivation, risk-taking behaviour and propensity to innovate (Della Torre et al, 2020; Ederer and Manso, 2013; Frey and Jegen, 2001; Kuvaas et al, 2020). For example, Ederer and Manso (2013) showed that PRP incentives (profit-sharing in their case) are effective in motivating innovation only when the structure of the incentive includes a reward for long-term success and tolerance for early failure.…”

“…Second, it differentiates between individual and collective PRP, whereas most of the existing literature often reflects on single or general PRP schemes (Carlson et al, 2006; Ederer and Manso, 2013; Messersmith and Guthrie, 2010), or on indices capturing the comprehensiveness of PRP schemes adopted (Faems et al, 2005; Sheehan, 2014; Wang et al, 2018). Existing evidence on large firms indicates divergent effects of multiple PRP incentives (Della Torre et al, 2020; Pendleton and Robinson, 2017), thus suggesting an extension of this approach to SMEs for a deeper understanding of the effects of PRP may be relevant.…”