{"id":942,"date":"2023-06-21T08:05:12","date_gmt":"2023-06-21T06:05:12","guid":{"rendered":"https:\/\/blog.iese.edu\/family-business\/?p=942"},"modified":"2023-10-06T11:36:52","modified_gmt":"2023-10-06T09:36:52","slug":"how-employee-incentives-drive-innovation-in-family-firms","status":"publish","type":"post","link":"https:\/\/blog.iese.edu\/family-business\/2023\/how-employee-incentives-drive-innovation-in-family-firms\/","title":{"rendered":"How employee incentives drive innovation in family firms"},"content":{"rendered":"

Innovation is the name of the game in today\u2019s hypercompetitive markets: in order to survive, companies need to continuously innovate<\/strong> their products, processes and operations.<\/p>\n

Based on conventional wisdom, family-owned firms are at a disadvantage in this regard, with risk aversion, conservative attitudes, organizational rigidity and limited capital<\/strong> commonly cited as obstacles to innovation.<\/p>\n

At the same time, their anchorage to the past<\/strong> is also seen as a roadblock, undermining their openness to experimentation, adoption of new strategies and overall innovation potential.<\/p>\n

But are these widely held beliefs actually true<\/em>?<\/strong> Empirical evidence suggests otherwise.<\/p>\n

New insights on family firms and innovation
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Family business theory and practice posits that family firms deeply rooted in tradition hold on to their history and past<\/strong>, while those less attached are more forward-looking and willing to evolve<\/strong> and explore new terrain.<\/p>\n

Yet academic studies challenge this view, finding little correlation between family firms\u2019 attachment to tradition and innovation outcomes.<\/strong> In fact, half of Europe\u2019s most innovative firms are family-controlled, and in emerging economies, examples abound of path-breaking innovations led by family firms.<\/p>\n

Based on recent research<\/strong><\/a>, employee incentives might play a role in a family firm\u2019s ability to drive innovation.<\/p>\n

Employee incentives and innovation<\/span>
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By sharing knowledge and promoting change, employees are vital to spurring organizational innovation<\/strong>, yet the best incentives to motivate them are the subject of debate.<\/p>\n

Some scholars say economic, calculative-based incentives<\/strong> based on tangible rewards are more effective, while others suggest point to a collaborative and relationship-based incentive system<\/strong>, grounded on teamwork and collaboration.<\/p>\n

This debate extends to the realm of family business, where academics are divided<\/strong> on which model best inspires employee-led innovation: controlling and contractual human resource management (HRM) systems or a more supportive, flexible approach.<\/p>\n

Striking the right balance<\/span><\/strong><\/h2>\n

Inspiring innovation in family firms requires a nuanced approach by acknowledging the diversity among them. Their degree of attachment to tradition has a significant effect, as found in the aforementioned study<\/a><\/strong>:<\/p>\n

(1) In family firms with a h<\/strong>igh <\/em>attachment to tradition, a supportive and flexible approach leads to higher levels of innovation. <\/strong><\/p>\n

This approach eschews economic HRM constructs like salary incentives or pay-for-performance models and focuses instead on non-economic aspects such as:<\/p>\n