SSRN-Motivating Innovation by Gustavo Manso

I was actually looking for another paper by Manso on step up bonds when I found this one. It is pretty cool and very intuitive (you can't punish failures if you want people to take chances).

SSRN-Motivating Innovation by Gustavo Manso:

"...incentive schemes that motivate exploration are fundamentally different from standard pay-for-performance incentive schemes used to induce effort. The optimal compensation scheme that motivates exploration exhibits substantial tolerance (or even reward) for failure and reward for long-term success. Moreover, even though the principal can terminate the agent, inefficient continuation may be optimal to motivate exploration, since the threat of termination may prevent the agent from exploring new untested approaches. Finally, commitment to a long-term compensation plan and timely feedback on performance are essential ingredients to motivate exploration. The institution of tenure, debtor-friendly bankruptcy laws, and golden parachutes are examples of schemes that protect the agent when failure occurs and thereby encourage exploration."

This also has some implications for grading presentations and papers, but before I get into that, I better head to class.

Cite:
Manso, Gustavo, "Motivating Innovation" (January 2, 2006). AFA 2007 Chicago Meetings Paper Available at SSRN: http://ssrn.com/abstract=891514