As boards look to the post-pandemic future, innovation and growth are moving to the top of the agenda for many companies. Compensation and strategy experts suggest that boards can foster an innovative culture at their companies by attuning compensation plans to forward-looking metrics as well as offering a safe space for experimentation and the possibility of failure. Boards should play an active role in cultivating space for innovation to thrive.
Compensation experts say that boards looking to kick-start innovation should first examine their incentive plans and pay structures to ensure their executives are motivated to look toward the future.
“As companies are propelled into a continually new and changing world, incentive programs need to focus more on innovation,” said Aalap Shah, managing director at compensation consulting firm Pearl Meyer. Currently, he said, metrics in short- and long-term incentive plans are often backward-looking, such as EBITDA or revenue growth over the performance period. “And what that does, I think, it definitely speaks to the health of the business. But what it leaves behind—it doesn’t focus enough on how you propel the business for the future.”
For example, at organizations where innovation plays a central role, Shah said compensation programs can look at R&D spend or the growth of specific business units the company is investing in. According to a Pearl Meyer analysis of Fortune’s Future 50 list of the most innovative companies, companies on the Future list were more likely than those on the same year's Fortune 50 list to use forward-looking metrics in short- and long-term plans such as subscription growth, new users, customer churn, market penetration, net expansion rate, and environmental, social and governance factors.
Similarly, Shah said, increasingly difficult milestone metrics that show the iterative process of success over time can be a valuable tool. “If you allow for that range of possibilities, there’s likely more of a chance for innovative thinking to bubble up,” he said. “It’s important that these things are quantifiable. You want to make sure, from the board’s perspective, if you’re trying to encourage a culture of innovation, it doesn’t feel extremely discretionary.”