Oliver Hart of Harvard split this year’s Nobel Prize in economics for his work on incomplete contracts.
Imagine an inventor who needs to distribute a new product. Success will probably ride more on the inventor’s choices than on distribution. So it makes sense for the inventor to have the power to make the big decisions. The way to do that is for the inventor to be what economists call the “residual claimant.” That is, the inventor has the rights not only to the invention but also to the distribution channels.
What happens in a company when the managers do not have the incentive for overall firm success, but rather are rewarded on things like profits?
I’ve seen many folks in these positions focus so much on the short term that they often miss opportunities to gain traction by taking a leap that might require a temporary stall in operations or retooling of something internal.
Sometimes you have to give the machine a tuneup or even buy a new machine, and if managers aren’t incentivized in the right way, they can “leave that worry for the next person” who will fill that role and let an opportunity to leap forward pass them by.
All employees at the Ritz-Carlton are famously empowered to spend up to $2000 without managerial approval to solve a problem.
Can we apply this same thinking to innovation? I’ve worked with many companies where employees and managers have great intuition in marketing, but never float the necessary ideas to the top in favor of politics and “picking battles”.
If you are at the top, I implore you to design compensation around encouraging successful innovation; and encourage everyone to speak up when they have these intuitions.
The culture of “They’ll never approve this.” Is of your own making. It’s yours to unmake.
Also published on Medium.