The Role of Individual-level incentives on SMEs Innovation

Abstract

The research study presented here highlights and illustrates the importance of considering the individual employees level of incentives as one of the, if not, a key driver of small and medium sized businesses to achieve innovation and success. Both pecuniary and non-pecuniary rewards should be taken into consideration as at different stages employee’s preference are changing. It has been found that the individuals at SMEs strongly affect the performance of the firm, which is evident in both the short term and long-term operations of the firm. The level of motivation of these individuals has been considered as a key factor to encourage work efficiency not only in the field of innovation, but in the whole enterprise. By drawing from the quantitative data, which was in the form of a questionnaire survey, it has been discovered that the employees in such firms value the level of contribution for their effort. This research study is different from the motives and benefits of innovation involvement. In addition, it has been found that highly motivated employees are likely to be aligned with company interest, as they feel their presence felt throughout which in return allows them to be much more focused.

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TABLE OF CONTENT

ABSTRACT………………………………………………………….............................................iTABLES OF CONTENT……………………………………………............................................ii1. INTRODUCTION…………………………………………………………………………….11.1 Aims and Objectives…….…………………………….............................................................3

2. LITERATURE REVIEW……………………………………………………….………….....42.1 Why does individual incentives matter ......................................................................................42.2 Classification of benefits and motives.....……………... ……………………………………...62.3 The role of individual pecuniary incentives on SMEs innovation....…………………………..82.4 The role of individual nonpecuniary incentives on SMEs innovation…………………………9

3. METHODOLOGY…………………………………………………………………………….11

3.1. Research approach: questionnaire survey……….…………………………………………….113.2. Strategic Packages for the social science (SPSS) …………………………………………….113.3 Research ethics…..…………………………………………………………………………….113.4 Research limitation………………………..…………………………………………………...11

4. RESULT .....................................................................................................................................124.1 Demographic……………………………………………………...……………………………124.2 Current Incentive Programs Employed by the organization…………………………...............134.3 Employee satisfaction.............................................................…................................................134.3.1 Current Incentive Plan Satisfaction………………………………………………………….134.3.2 Employee Job Satisfaction and Motivation………………………………………………….134.4 Incentive Preference………..………………………………..…................................................144.5 Incentive plans effects on Innovation and Motivation………………………………………....144.6 Employee’s perspective on incentives and innovation….……………………………………..164.7 Motivating factors for engagement in organization innovation……………………..…………164.7.1 Does an employee’s motivation to engage in frim innovation depend upon the current incentive plan of the organization………………………………………………………………….164.7.2 Does an employee’s current level of contribution to the firm help motivate him engage in firm innovation depend upon the current incentive plan of the organization? .........................................174.7.3 Will the employment of employee’s chosen method of motivation help motivate him engage in firm innovation?............................................................................................................................184.8 Does employee demographics have an effect on their opinion of successful motivation techniques for firm innovation?.........................................................................................................195. DISCUSSION…………………………………………………..……………………………….205.1Demographic influence on innovation ………………………………………………………….205.2 Individual motives for supporting firm innovation……………………………………………..21

6. CONCLUSION AND IMPLICATION…………………..........................................................22 6.1 Conclusion.………………………………………………….......................................................226.2 Future implications.......................................................................................................................22

The Role of individual level incentive on SMEs innovation

Introduction

It has been found that innovation and firm performance has a strong relation and contribution for economic firm performance as well as societal welfare (Sauermann, 2008). While most of modern research were focused on firm level. Different research suggest that innovation at the firm level strongly depends on the level and nature of the efforts of individuals (managerial and non-managerial employees) that are responsible for innovative activities on firms. These individuals react to a diversity of individual-level incentives of a pecuniary as well as non-pecuniary nature (Amabile, 1996; Katz, 1993; Kidder, 1981; Stephan, 1996; Zuckerman, 1988). Innovation is the way of transforming the resources of an enterprise through the creativity of people into new resources and wealth (Schumann)

Innovation is undoubtedly important tool that provides opportunities for new inventions and building of new markets (Kuhn & Marisck, 2010). Moreover, there is an astonishing increasing interest trade and industry growth based on innovation and creation of competitive advantage (Birkinshaw, 2011; Clawson, 2009; Grant, 2010; Hamel, 2002; Kim & Mauborgne, 2005). Nowadays, SMEs that rely on innovation creates competitive advantage through the provision of innovative organisational capabilities (new ways of product realisation) rather than a new product or process. The best example is the appearance of e-commerce market, which spectacularly changed market and customer demand pushing SMEs to adopt new means of production and realisation. There are 125 million formal micro, small and medium enterprise (MSMEs) in this set of economies, including 89 million in emerging markets (see appendix 1). For instance, small and medium-sized businesses in United Kingdom account for 99.9% of private sector companies and provide 60% of private sector jobs. According to the Department for Business Innovation and Skills (2014) at the start of 2014, 99.3% of the 5.2 million private sector businesses were small and 99.9% were small or medium sized (SMEs). 18% of all SMEs in the UK private sector operate in the Construction sector while 15% operate in the Professional, Scientific and Technical sectors. This statistic undoubtedly explains the importance of small and medium business. Similar statistic could be seen in other countries and the percentage of SMEs varying between 97-98 % of all business in the country.

Kanter (2006) describe innovation as a natural renewable source accessible to all restricted only by human effort. Incredible growth of competition in a modern world require organizations to pursue innovative strategy as the source of sustainability and growth (Teece, 2007). Modern companies rely on the provision of innovative organisational capabilities as the buying behavior changed dramatically since last decade. It has been suggested by researchers that SMEs have limited innovation as compared to larger enterprises. However, Kaufmann and Todtling (2002) who highlight that SMEs are more innovative due to their heterogeneous character but are restricted in innovative capacity due to their financial and human resources have negated this misconception. Similarly, Rosenbusch et al (2011) have identified several factors that affect the relationship between innovation and SME performance. They are of the view that new SMEs benefit more from innovation than large organizations mainly due to their ability to accept change in their environment, industry or market. On the other hand, high-tech start-ups have cutting-edge technology in-house, but no manufacturing and financial capabilities or distribution channels to turn the technology into a successful and profitable business. (Vanhaverbeke et al, 2012)

While motivation is determined by both financial and non-financial factors, money has come to play an overly role in our thinking about the causes of behaviour. In most companies, very limited time and effort put on considering non-financial source of motivation (Gratton, 2004). In the ‘‘2001

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Figure 1 Importance of job characteristics for S&E doctorate recipients (n=31.366) Source based on 2001 Survey of Doctorate Recipients, National Science Foundation, Division of Science Resources Statistics

Figure 2 Ranking of importance of job characteristics; engineering and science professionals versus workers (n= 477) Source Based on GSS 1967-2000 Cumulative Datafile, University of Chicago National Opinion Research Center

Survey of Doctorate Recipients’’ over 30,000 engineers and scientists with doctorate degrees indicated the importance of a range of factors when thinking about a job. The results show that individuals perceive nonpecuniary factors as extremely important when thinking about jobs (see figure 1). General Social Survey (GSS), conducted by the University of Chicago National Opinion Research Center shows the result of two different types of occupation – scientific-engineering-related and production specialty (see figure 2). According to that data, the importance of nonpecuniary incentives is larger for scientific and engineering professionals than for production workers, as reflected in the relative importance of the characteristics ‘‘High Income’’ and ‘‘Work’’ is important and gives a feeling of accomplishment’’. Thus, the incentives of engineering and scientific professionals appear to differ from those of production workers.

Figure 1 2001 NSF Survey of Doctorate Recipients

Figure 2 Ranking of job Characteristics

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This paper contribute to the business and corporate governance literature highlighting individuals' motives and incentives as a factor that may strongly affect firms innovative performance. Hansen et al. (2002) suggest that many organisation cannot make an adequate distinction between recognition and reward – which is most important aspect of tangible and intangible incentivisation. Those organisations mistakenly think that in order to increase performance and motivation they simply need to find the correct incentives, however the truth is that recognition and reward – two different mechanisms of motivation (Silverman, 2004). Moreover, this research is also contribute to the study of the principal-agent problem. The principal-agent problem involves a risk-neutral principal who must use incentives to motivate risk-averse agent to take expensive, unobservable action to improve principal’s payoff (Miller & Whitford, 2002). In that theory agents could be any individual who directly affect company performance. Hence, principal use financial and non-financial incentives to motivate its employee to act on principals behalf and be conformed to the organisation goals. I suggest that considering individual-level incentives as a part of organizational capabilities may significantly increase our understanding of the micro-foundations of organizational capabilities.

1.1 Aims and Objectives

Innovation undoubtedly plays a crucial role for the firm and economic welfare that is why I intend to provide a detailed characteristic of motives, which affect SMEs performance. I focused on individual incentives, so I will discover and describe the potential of individual incentivisation of small and medium business and its impact on company welfare. Therefore, I will propose my implication on how employers may structure its incentives scheme and how to adopt those incentives to the particular types of business. I will provide quantitative research through questionnaire, which will be tested at IBM SPSS in order to see what the motives of individuals engaged in firm innovation are. In addition, it helps me to study their desires towards their incentive scheme. Questionnaire help me to study employee’s behaviour and opinion about the role of the incentivisation of innovation. Similarly, to Schumpeter’s theory¹, I suggest there is a strong need to study motives and incentives of individuals engaged in organisational innovation.

Therefore, my research will be followed by three research questions:

1) Why does SMEs encourage innovation at individual level?2) What are the motives of individual engaged in organisation innovation?3) What type of individual incentives are most likely to encourage firm level innovation?

¹In the ‘Capitalism, Society and Democracy’, Joseph Schumpeter predicted that large business organizations would be unable to provide the individuals with sufficient incentives to overcome the competitive challenge represented by socialist economies. Although this prediction has not been realized, Schumpeter’s discussion highlighted the importance of the incentives of individuals within firms for economic outcomes. For those of us concerned with innovation, his argument highlights, first, that individual-level incentives may matter for innovative performance, in addition to the firm-level incentives that are typically at the center of

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economists’ attention. Second, these individual-level incentives are of a diverse nature and include not only pecuniary incentives, but also intrinsic incentives (e.g., the joy to invent) and social incentives (e.g., peer recognition)

2. Literature Review

2.1 Why does individual incentives matter?

“An incentive  is something that motivates an individual to perform an action. The study of incentive structures is central to the study of all economic activities (both in terms of individual decision-making and in terms of co-operation and competition within a larger institutional structure). Economic analysis, then, of the differences between societies (and between different organizations within a society) largely amounts to characterizing the differences in  incentive structures  faced by individuals involved in these collective efforts. Ultimately, incentives aim to provide value for money and contribute to organizational success. (Armstrong, 2013)

Individuals define themselves within a system of social categories based on numerous attributes including norms, values, and beliefs (Turner, 1975). Whether an individual is born a member or joins the group later, others within that group reinforce the individual’s perspectives. Individual level innovative capabilities at workplace are significant aspect that help an organization to create competitive advantages in strategic competition and in ever changing environment (Kanter, 1983; West & Farr, 1990). Individual Innovation provides an organization foundation for high performance (Carmeli, Meitar, & Weisberg, 2006; Janssen, Van de Vliert, & West, 2004). In addition, it enables an organization to improve its competitiveness (Schilling, 2008) and promote long-term success (Smith, 2002). The importance of innovation for organizational success has been increasingly noted in the conceptual and empirical literature of the organizational sciences (e.g., Ederer & Manso, 2011; Agars, Kaufman, & Locke, 2008; Anderson, De Dreu, & Nijstad, 2004; West, 2002). However, to little attention has been taken to the exact monetary and non-monetary incentives and motives that encourage individual to take part in innovation. Hence, to address this gap I decided to provide quantitative research about the role of pecuniary and non-pecuniary incentives and the impact of those factors on SMEs innovation.

Most researchers normally compute a company’s ability based on its performance (Bonn, 2000; Rosli & Sidek, 2013) and growth (Dobbs & Hamilton, 2006). The concept of firm growth based on the law of proportionate effect, which states that the firm growth is proportional to the firm’s current size. However, this law fails to hold in relation to the age of firm and show a negative relationship between growth and firm size and age (Hutchinson & Xavier, 2004). The empirical research indicates that there is positive relationship between innovation and growth of the firms if there is a constant supply of finances (Hyytinen & Toivanen, 2003). In the presence of innovation, the overall firm performance would enhance (Rosli & Sidek, 2013; Damanpour, 1991; Lin & Chen, 2007, Van Auken, et al. 2008; Li, et al. 2010; Salim & Sulaiman, 2011). As has been noted before the innovative SMEs rely on the level and nature of individual engaged in innovation. This individual affect firm-level welfare and this welfare depends strongly on the motives of that individual. This shows that innovation is critical for the growth of the organization in terms of its sales, market penetration, profitability and sustainability of organizations especially for small and medium enterprises. Moreover, R&D employee or individual who are responsible for organisation innovation should be motivated and supported more as their ideas and invention would directly affect SMEs survival and competition.

The key contribution of the paper is to show that incentive schemes that motivate innovation should be structured differently from standard pay-for- performance schemes used to induce effort or avoid tunneling and cheating. That is why standard P4P schemes that punish failures with low rewards

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and termination may have adverse effects on innovation (Manso, 2011). While simple incentive plan with a low reward and tolerance of failure of newcomers can increase the firm performance dramatically. Such strategy are widely used in innovative SME start-ups. Sauermann (2008) define individual-level incentives as expected pecuniary or non-pecuniary benefits that are contingent upon individuals' employment, effort or performance. Until recently, agency theory literature focused on financial incentives. However, a relatively new stream of literature (sometimes called "behavioral agency theory") has emerged that explicitly develop different types of individual motives and incentives, including those of a nonpecuniary nature such as "respect", "recognition", "identity" or "intrinsic motivation" (e.g., Akerlof & Kranton, 2005; Besley & Ghatak,2005; Ellingsen & Johannesson, 2007; Lacetera & Zirulia, 2008; Murdock, 2002).

There is around 39 systematic studies investigating the effects of individual incentives (Jenkins, Gupta, Mitra, & Shaw, 1998) and 10 studies investigating the effects of group incentives (Honeywell-Johnson, McGee, Culig, & Dickinson, 2002) have been conducted. Additionally, only six studies have compared the relative effects of individual and equally-divided small group incentives (Allison,Silverstein, & Galante, 1992; Farr, 1976; Honeywell, Dickinson, & Poling, 1997; London & Oldham, 1977;Stoneman & Dickinson, 1989; Thurkow, Bailey, & Stamper, 2000).While most of the study on micro-foundations has taken the perspective by examining how cognitive processes at the individual level affect firm level outcomes (e.g., Gavetti, 2005; Reger & Huff, 1993; Tripsas & Gavetti, 2000) I decided to focus on the motives and incentives of the individuals engaged in the firm innovation.

In order to study different types of incentives more precisely I have been followed Sauermann’s (2008) typology of motives and benefits. Although, there are a number of other similar study (Elizur, Borg, Hunt, & Beck, 1991; Sagie, Elizur, & Koslowsky, 1996; Ros, Schwartz, & Surkiss, 1999; Stephan and Levin, 1992; Super, 1964)) Sauermann’s typology appears to be the most relevant and appropriate to this research study. This classification provides full understanding of employee motives in respect to the source of benefit (external vs internal to the individual) and with respect to the specific social context. In addition, it helps to distinguish between broader classes of benefits and motives. Sauermann defined individual incentives based on two dimensions: extrinsic vs intrinsic and social vs non-social. (see figure 3)

Figure 3 Typology of benefits and motives

Source: Sauermann, H. 2008. Individual Incentives as Driver of innovative Process and Performance.

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2.2 Classification of benefits and motives

Extrinsic benefits

Some external institution such as employer, market or a customer provides those benefits. Such benefits do not directly engaging in the task, but are indirect task outcomes. Extrinsic benefits are those often considered by economists, and within this class of benefits, economists typically focus on those which are pecuniary. Extrinsic benefits from R&D can be characterised with a direct monetary or other tangible rewards such as pay raises, royalty income from patents, research funding, or bonuses, paid leaves, annual recreational plans etc. Extrinsic benefits actually fulfills employees extrinsic factors or hygiene factors and thus do not let him start thinking about leaving the company. In other word this benefits reduce a voluntary turnover – very important rate, which decrease employee willingness to leave company or join another. These benefits might be useful for long-term oriented SMEs who has limited number of employees. Particularly, small companies would rather invest into the employees who had direct impact on company social and financial welfare than acquire a new unexperienced worker.

Intrinsic benefits

Intrinsic rewards  carry out employee’s intrinsic factors or motivators and thus motivates him, for example by giving challenging task, involving in decision making process, giving a higher rank in hierarchy etc. All these rewards do not required to have increased salary as well and employee may be working at higher management rank without higher salary and still be more motivated. Such benefits originate within the individual or the activity itself – not the environment - and are often a function of the interaction between characteristics of the activity (e.g., nature of the task, reason of the task) and of the individual (e.g., interest in the task, ability to accomplish the task). Intrinsic motivation is the internal feeling that feed one desire to achieve or carry out in actions. Manager who gives non monetary recognition to employees in different ways like saying thank you, the manager writing formally to record thanks, give acknowledgment of their work and effort in a meeting or in a team meeting, in newsletter of organization, present awards or certificates to individuals ‘employee of the month or year (Khan et al., 2014) Herzberg (1966) in his famous two factor theory argued that fair salary is a hygiene factor which is effective to prevent dissatisfaction but it doesn’t necessarily results in motivating employees. That is why organisations tend to provide intrinsic social and non-social incentives such as tickets to cinema, amusement park, summer camp for their children to show that the company care about its employee, therefore achieving intrinsic benefits such as feeling of achievement and feeling of contribution to the success of the organisation. Some intrinsic benefits, such as task enjoyment and intellectual challenge, are realized directly from the process of engaging in certain activities and are thus effort-contingent (Amabile, 1996; Stephan, 1996). Others, such as a feeling of achievement, mastery or self-competence, result directly from task outcomes.

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Social Benefits

Social benefits embrace non-monetary benefits that originate from social relations and associated perceptions. Employees whose opinions are considered and appreciated tend to work harder than other employees. When we are discussing about social non-monetary incentives, we need to focus on appreciation and praise of employees. Saks (2006) explained that appreciation and recognition strengthen employees’ belief about themselves that is very important factor. It helps to increase their self-esteem, self-confidence, which in return makes a difference to their workplace by putting more effort. Extrinsic social benefits are provided by others, either informally (e.g., social approval, peer recognition) or more formally through institutionalized "award" systems, which is the most common way of incentivisation. Other social benefits such as self-administration may derive individuals pleasure from contributing to the well-being of individuals with whom they have a social relationship (Fehr & Falk, 2002; Fehr & Fischbacher, 2002). Social benefits may be obtained from a reference group within a focal organization or from others who stand outside of the organization, as illustrated by the importance that academics often bind to the number of citations that their publications command from other academics. Social incentives may be particularly important in teams or organizations to the extent that members develop a high degree of cohesion and mutual commitment (Alvesson, 2000; Kidder, 1981; Knoke 1990; O'Reilly, 1989; Ouchi, 1979). Hamilton et al. (2003) suggest that some of the apparent productivity benefits observed for teams in a production environment may be due to nonpecuniary rewards associated with team membership. To the extent that individuals internalize social benefits, these benefits become intrinsic benefits in that their realisation does not then depend on any external actor or institutions. Such internalized social benefits also resemble the norms highlighted recently by Akerlof and Kranton (2005).

Nonsocial Benefits

These benefits are not conserned about particular social context. For example, to the extent that pay is valued for its purchasing power, it is an extrinsic benefit that is valued regardless of the particular person or group providing that pay. Similarly, intrinsic benefits derived from intellectual challenge or from satisfying curiosity do not require any outside agents and are not contingent on any relationship with the social environment. This kind of incentives focus on the matters that are job related which leads to employee motivation. If the employee gets satisfaction from the job that he is doing than he will be more motivated. This could be done because there are some features of job that satisfies sense of accomplishment, self-esteem need of employees. Job related non-monetary incentives also have impact on intrinsic motivation. It help us to motivate employees, which are less costly and cut down cost of extrinsic reward. When employee’s get satisfaction from what he is doing he will get motivated without any extrinsic reward. Secondly, less supervision will be needed for specific task as employees will be motivated internally (Khan et al. 2014)In other word, different types of benefits and incentives may be correlated and hard to distinguish empirically. For example, an individual who receives a publicly announced bonus may simultaneously derive extrinsic nonsocial benefits (the actual money), extrinsic social benefits (peer recognition), intrinsic nonsocial benefits (feeling of achievement) and intrinsic social benefits (having contributed to the success of the organization). The broad conceptual distinction across the extrinsic-intrinsic and social-nonsocial dimensions is nevertheless useful to underscore that different motives can apply to R&D employees, and these different motives, in turn, can originate from distinct sources.

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2.3 The role of individual pecuniary incentives on SMEs innovation

Individual monetary incentives are likely to result in higher performance than group incentives because the link between a person’s pay and his or her performance effected by overall group performance, not the individual (Dierks & McNally, 1987; Lawler, 1990; McCoy,1992). It may have a reverse effect as some individual perform less and as result, it led to demotivation tendency. In all public and private organizations, need is the main factor that motivated employees to be more productive, innovative and efficient in their functioning, in addition to the other factors. Ability to motivate employees to work energetically and creatively toward the achievement of organizational goals are one of the most important inputs to organizational success. Hence, the challenge for organizations is to ensure that their employees are highly motivated (Yavuz, 2004).Empirical findings tend to find evidence for both the argument that extrinsic rewards stimulate (Eisenberger & Rhoades, 2001; Jenkins, Gupta, Mitra, & Shaw, 1998; Ramamoorthy, Flood, Slattery, & Sardessai, 2005) or deter creativity/innovativeness (e.g. Kruglanski et al., 1971). Building on these contradictory findings Baer et al. (2003) studied the effect of extrinsic reward on employee creativity, taking into account the role of first job complexity and second the cognitive style of the employees. His data suggested that reward has very different (and opposing) relations with creativity, depending whether the employee has a simple or complex task.

Individual pecuniary incentives such as money, promotion, holiday is a traditional form of motivation that refers to compensation and benefits. Nevertheless, it is a short-term motivator and as result, adding more tangible rewards does not necessarily increase engagement and performance. On the other hand removing those tangible benefits would disengage and demotivate employees dramatically. A recent survey found that 78% of U.S. companies use monetary rewards to motivate their employees and that these companies spend approximately $1 billion each year on rewards (Incentive Federation, 2003).

The main purpose of monetary incentives is to reward employees for excellent job performance through money and other money related bonuses, such as retirement benefits, medical reimbursement, etc. Since human resource is the most valuable resource of any organization, employers must activate, train, develop and above all motivate its employee to achieve individual and organizational goals. Individual innovativeness provides an organization basis for high performance, improves firm’s competitiveness and fosters long-term success (Kalyar, 2013). This area is of greater interest for entrepreneurs because individual level innovation is linked with firm-level innovation. As noted before, innovation strongly depends on the level of effort of the individual engaged in innovation. organisations, in its turn have to make sure their employee are motivated enough before engage in important business processes. And monetary cash is always basic assumption.

One of the most common problems facing most employers in both public and private sector is how to motivate their employees to improve firm performance. Most economic and management literature mainly based on assumption that monetary incentives improve performance. It is generally believed that effect of monetary incentives is unambiguously positive a large monetary incentive improve employee performance (Goddy Osa, 2014). However, it has been found that monetary incentives itself does not increase or encourage innovation in SMEs. Moreover, giving people financial rewards can well undermine their intrinsic motivation and negatively affect their

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innovative and creative performance (De Spiegelaere, Van Gyes, Van Hootegem, 2013) Earlier studies showed that the relation between rewards and creativity is very complex (Baer et.al., 2003). Therefore, I suggest considering mix of extrinsic and intrinsic rewards as key driver of SMEs innovation. However, every incentive scheme should be adopted according to the industry and number of employee.

2.4 The role of individual nonpecuniary incentives on SMEs innovation

Based on NSF survey data provided from over 9,000 scientists and engineers SETAT (2003) individuals pecuniary motives, such as desire for pay and job security, differ significantly between startups and established firms, while their nonpecuniary motives, such as desire for intellectual challenge and independence, are quite similar. It means that companies put too much effort on satisfying financial needs, while they simply cannot satisfy non-financial needs such as self-esteem or feeling of achievement. Other research conducted by Aspect Market Intelligence (2013) show that U.S market has 98% of businesses running non-cash programs include merchandise or gift cards as a reward, spending $54.4 billion each year. It seems that most companies has already put more effort on planning .According to Bersin & Associates Research (Garr, 2012) there is a $46 billion market for employee recognition (gold watches, pins, thank-you awards, plaques, etc.), and that research shows that companies spend between 1-2% of budget on such stuff which is quite major sum. This research found that 87% of the recognition program based on tenure. The more you stuck to the company the more benefits you have. It has been found that companies who are in the top 20% firms with a “recognition-rich culture” has 31% lower voluntary turnover rate which is a dramatic statistic.

According to Maslow (1943), people are motivated to satisfy their needs and those needs can be classified into the following five categories that are in an ascending hierarchy: Physiological needs, security needs, social needs, esteem and self-actualization needs. With the higher order needs of esteem and self-actualization, Maslow emphasises the importance of non-monetary incentives in motivating the people. Non-monetary incentives address these higher order needs, rather than any basic needs such as food and shelter. If it is awarded as an appreciation of a contribution, a tangible non-monetary incentive will remind the employees of their performance and recognition for it, filling the needs for self-esteem and it will create esteem in the eyes of co-workers, family, and friends. It will satisfy employees’ recognition and respect needs. As the result, it increase firm performance.

One example to fulfill that concept is the example of Napster success in the music industry. In 1999, an 18-year-old juvenile named Shawn Fanning changed music industry forever by allowing computer to swap and change music files though a computer server. He has created the source code that combine music-search function with a file-sharing system allowing communication and mp3 file share between customers. Much of Napster’s early success resulted from the help Fanning received as a member of an identity-based group. The group, known as w00w00 Security Development, emerged from a younger generation of programmers and hackers. Group members recruited each other in order to gain special skills in hacking and programming. The similar groups such as e18.org and Association de Malfaiteurs also have supported them. Fanning bootstrapped valuable programming assistance from numerous individuals in the group at various stages of Napster’s development (Webb et al., 2009). Most of that help was without any cost, as these individuals wanted to help more for the enjoyment of programming than for financial gains (Menn, 2003; Merriden, 2001).Thus, Fanning’s identity-based relationships were instrumental to the financial bootstrapping of critical resources. Fanning demonstrated that such motive as feeling of achievement (intrinsic nonsocial benefit) could directly affect firm performance. Although the work efficiency was very high he did not even paid its employees for their contribution. Napster was a

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“catalyst for the normative reconceptualization of copyright in society” (Green, 2002: 799). They changed music industry dramatically by changing copyright law and allowing the growth of new businesses industries (e.g KaZaA, MusicNet etc). Hence, the importance of nonmonetary incentives cannot be denide and should be carefully structured according to the enterprise goal.

It has been found that time has incredible impact on employees behaviour and motives. Hence, according to Maslow theory employees who satisfied basic need such as food, water, security may tend to change their behavior into more intangible such as recognition, respect etc. If it is so, those people are more likely to respond positively on innovative task. Like Maslow’s hierarchy of needs theory, Alderfer’s theory (1972) points out the need for organizations to find ways to satisfy belongingness needs of employees through social activities in organization, to recognize employees, encourage their participation in decision making, offer opportunities of development and autonomy in job. Therefore, it gives opportunity to exploit employees much better even if they are not interested in firm innovation. As long as employee interested in organisation welfare he will respond to a new task much better and with more enthusiasm as those who are not inspired to do so. Accordingly, Herzberg contributed to the idea of “job enrichment”. Job enrichment is adding more tasks to a job to provide greater involvement and interaction with the task. Adding tasks can make the jobs more challenging to the employees and it may enable the employees to use their talents, demonstrate their potential. Therefore, individual nonmonetary incentives might be crucial for SMEs survival as the experienced and most important employees may leave the company due to the luck of such nonpecuniary motives as respect, recognition or feeling of success.

Non-monetary or non-cash incentives do not involve direct payment of cash and they can be tangible or intangible. Although, it does not involve direct payment it does not mean that companies do not spend money on non-pecuniary incentives. On the contrary they spend much more money on non-pecuniary incentives in form of gifts, recognition rewards etc. Some examples of this kind of incentives are; encouraging the employees by providing them with autonomy and more responsibility in their job, allowing them to use variety of skills and knowledge, participation in decision making, promotion, recognizing any single contribution or good work verbally or through small gifts, letters of appreciation, plagues, tickets to social or sports activities etc., assigning challenging duties, improving working conditions, organizing social activities in the work place (Yavuz, 2004) Therefore, providing them with all goods, so that develop their creativity and as result involve them into organisation innovation.WR3

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3. Methodology

3.1 Data collection 3.1.1 Research approach: questionnaire surveyFor the purpose of data collection, an online questionnaire survey was conducted. The questionnaire comprised of 11 open and closed questions. The questions covered a range of factors, including participant demographics, work environment, motivation levels, amongst others. The advantage of incorporating open ended questions was to give the participant the opportunity to voice his/her opinion. All questions were constructed using simple terminologies- the objective being that any layman must be able to understand the questions put forward. Furthermore, time was also a factor considered whilst constructing the survey. To avoid using up too much of the participants time, which may have resulted in many leaving the questionnaire half way through, the questionnaire was formulated on the basis of a 2-5 minute timeline. 3.1.2 Strategic Packages for the social science (SPSS)For the purpose of this study, the researcher analysed all the collected data using the Strategic Packages for the social science, also known as SPSS. Other software tools, such as Eviews, were also considered for the evaluation of the data. It was however concluded that SPPS, with its easy user-interface, would be better suited for the achievement of the researcher’s goals.Simple descriptive tools, such as bar charts and pie charts, are used to represent the data provided by participants. Correlation tests were utilized, to test the relationship amongst certain variables, while regressions were applied to test the dependence of innovation on incentives, dependence of employees’ motivation on incentive and

3.4 Research ethics In order to ensure that ethical rights were not violated, during the course of the research, none of the participants were required to provide personal details, other than age and gender. Research has been approved prior to starting the questionnaire, participants were provided with a statement, pertaining the research’s object, along with the purpose and technique in which the data provided by the participants will be used to conduct the research. It was mandatory for all participants to read the statement, once thy agreed to the terms and conditions; they were redirected to the research’s questionnaire. Furthermore, participants were also not required to provide their names, thus ensuring a complete level of anonymity.

3.5 Research limitationOne of the primary factors that threaten the results of the research is the size of the sample. Due to the small size, the data and its subsequent analysis do not have the strength of a vast amount of data supporting the researcher’s claims. There is thus a small likelihood that the results of the conclusion may be skewed towards a certain hypothesis. Time constraints also prevented the researcher from conducting a separate survey for the different levels in the hierarchy of an organization. This may have aided the researcher in analysing why SMEs encourage innovation at individual level, from the perspective of the senior management. It could have also helped differentiate whether incentive preferences and individual innovation goals, vary amongst the different levels of the organisation.

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Furthermore, since the questionnaire survey was not conducted on a one-to-one basis, the researcher was unable to prompt participants to prove detailed answers for open ended question. While the questions have been phrased in the simplest of terminologies, lack of face-to-face interaction did not allow the participants the opportunity to ask the researcher any questions they had regarding the questionnaire. This may have resulted in misinterpretation, on the participants end, and the subsequent deliverance of in correct data for certain questions.

4. Results

4.1 DemographicsIn terms of the participants’ demographic information, age and gender were the only two factors that were deemed appropriate for the research’s objectives; the results for the population’s gender and age group proportions have been summarized in Table 1 and Table 2, respectively. Out of the total 38 participants, there was a higher representation of male participants as opposed to female participants; tallying at 28 males and 10 females. Furthermore, from the total population the 20-25 years of age and the 31-40 years of age groups had equal representation of 14 individuals. 9 participants belonged to the 26-30 years of age category, while only 1 individual represented the 40+ year of age group.

Rank value

Option Count

1A) Male 28

2

B) Female 10

4.2 Current Incentive Programs Employed by the organizationParticipants were asked to identify the incentive programs currently employed at their respective workplaces. Respondents were give three options to choose from; “Tangible”, which was defined as Money, holiday, promotion and gifts, “Intangible”, defined as Peer recognition, acknowledgement of achievements etc. and “Other”- defined by the respondents.26 participants selected “Tangible” incentives, while 6 selected “Intangible.” Since participants were given the option to select more than one option, some participants selected two categories and even all three. Out of 5 participants that had selected two options, results disclose the selection of both tangible and intangible incentives together; this indicates that these 5 respondents are currently employed at firms offering a combination of “Tangible” and “Intangible” incentives. 2 participants selected all three options, when asked to elaborate on their reason for selecting “Other”, they cited “skiing vacation” and “Stock options, perks.” No participant selected “Other” separately, nor did they choose a combination of “Intangible” and Other”

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Table 1: Gender ProportionsTable 2: Age Group Classification

Age Group

Number of Participants Percentage

20-25 14 37%

26-30 9 24%

31-40 14 37%

40+ 1 3%

4.3 Employee Satisfaction4.3.1 Current Incentive Plan SatisfactionAlmost half of the respondent population (47.4%) indicated that they were unsatisfied with their firm’s current incentive program, whereas 42% stated that they were satisfied, while 11% selected the “Other” option. Out of the 4 individual that had selected the “Other” option, reasons cited included, “not entirely satisfied” and “tangible should be increased”. Moreover, one participant stated a “general satisfaction,” whilst indicating aspirations for more “team building activities.” Another respondent stated that the dissatisfaction resulted from the inconsistency in incentive offered to employees across the firm, highlight specifically the inability of all employees to be eligible for the company’s incentive program.

Option CountPercentage

Yes 16 42%No 18 47%Other 4 11%

4.3.2 Employee Job Satisfaction and MotivationFurther investigation revealed that 76% of the population sought to participate in the organization’s innovation goals, while 24% stated that they did not wish to participate (Figure 2). It should be noted that in the context of this particular study innovation was defined as “strategies and means to increase the firm’s performance”. Furthermore, only 67% of the total population felt their contribution towards the company, while 12% stated that they did not feel the contribution at all (Figure 3). However, 21% stated that while they did not feel their respective contribution, they wish to rectify this in the future.

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Table 3: Are you satisfied with the firm incentives plan?

Figure 1: What does the incentives plan at your work look like?

Tangible Intangible Tangible+ Intangible

Tangible+ Intangible + Other

4.4 Incentive PreferenceOut of the total population, a substantial 64% stated that their incentive preference included a combination of both monetary and non-monetary benefits. 31 % said that they preferred purely monetary-based incentives, while only a small proportion of participants, 5%, stated that they preferred non-monetary incentives. (Figure 4)

4.5 Incentive plans effects on Innovation and Motivation68% of the participants stated the incentive program currently employed by the organization motivates them to be innovative, while 32% stated that the current level of incentives provided them with no motivation. (Figure 5)

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Figure 2: Would you like to take part at the firm innovation-focused ventures?

Figure 3: Do you feel your contribution to the company?

No24% 21%

No 12%Yes67%

Figure 5: Do you think firm level incentives motivate you to be innovative?

No32%

Yes68%

Yes76%

No, but I want o

Combination 64%

Monetary 31%

5%Non-Monetary

Figure 4: What is your preferred form of reward?

When questioned about their opinion of the general level of motivation amongst co-workers, more than half (55%) of the respondents felt that there was a “Medium” level of motivation in the organization. 30% felt that there was a “Low” motivation level amongst his fellow employees, while only 15% rated the overall motivation level amongst employees at their respective place of employment as “High” (Figure 6).

When question about their respective opinion pertaining to whether employee motivation is related to innovation- more specifically whether they believe that “a firm with higher employee motivation more likely to be innovative”, a colossal 87% stated that the higher the employees motivation the higher the likelihood of innovation. (Figure 7)

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Figure 6: How would you rate the motivation level of employees at your workplace?

Figure 7: According to you, is a firm with higher employee motivation more likely to be innovative?

No13%

Yes87%

High Medium Low

4.6 Employee’s perspective on incentives and innovationIt was discovered that a substantial 82% of the population felt that an amalgamated monetary and non-monetary incentive package is the best employee motivation strategy for a firm to adopt in of order to achieve a certain level of innovation in the organization. On the other hand, 11% of the participants felt that monetary incentive package would the best employee motivation strategy, while only 8% voted for firms to adopt a non-monetary incentive package. (Figure 8)

4.7 Motivating factors for engagement in organization innovation

4.7.1 Does an employee’s motivation to engage in frim innovation depend upon the current incentive plan of the organization?After regressing the employee’s desire to participate in firm innovation (dependent factor) against the current incentive plan offered by the organization (independent factor) it was discovered that the latter did have an effect on the former. As per the results in Table 4, the current incentive plan offered by the organization has a small, but statistically significant (p-value= 0.045), positive effect on an employee’s desire to participate in firm innovation (B=0. 153)With an F value of 4.306 and corresponding p-value of 0.045, the model proves to be statistically significant (p-value<0.05). Furthermore, with the model explains 32.7% of the variance in the regression.

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Figure 8: According to you, what would be a better motivation strategy to encourage firms to innovate?

Monetary Non-Monetary

Combination of Both

Model Summaryb

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .327a .107 .082 .41280

a. Predictors: (Constant), CurrentIncent

b. Dependent Variable: Participate

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression .734 1 .734 4.306 .045b

Residual 6.135 36 .170

Total 6.868 37

a. Dependent Variable: Participate

b. Predictors: (Constant), CurrentIncent

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) .995 .134 7.401 .000

CurrentIncent .153 .074 .327 2.075 .045

a. Dependent Variable: Participate

4.7.2 Does an employee’s current level of contribution to the firm help motivate him engage in frim innovation depend upon the current incentive plan of the organization?For the purpose of the question, the employee’s desire to participate in firm innovation (dependent factor) was regressed against the employee’s current level of contribution to the firm (independent factor).The current level of contribution has a negative effect on an employee’s desire to participate in firm innovation (B= .068), however with a p-value of 0.432 (p-value>0.05) this variable is statistically insignificant. With an R-value of 0.131, the model can only explain 13.1% of the variance in this regression. Furthermore, the results of the ANOVA test in table 5 indicate the model is not statistically significant (p-value>0.05)

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Table 4

a

b

c

Model Summaryb

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .131a .017 -.010 .43301

a. Predictors: (Constant), feel

b. Dependent Variable: Participate

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression .118 1 .118 .632 .432b

Residual 6.750 36 .187

Total 6.868 37

a. Dependent Variable: Participate

b. Predictors: (Constant), feel

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) 1.341 .149 9.024 .000

feel -.068 .086 -.131 -.795 .432

a. Dependent Variable: Participate

4.7.3 Will the employment of employee’s chosen method of motivation help motivate him engage in frim innovation?In the context of this question, results of the employee’s preference in what would be a better motivation strategy to encourage firms to innovate (independent factor) was regressed against the employee’s desire to participate in firm innovation (dependent factor).According to the t-test in Table--- the employee’s chosen method of motivation does have a statistically significant (p-value<0.05), positive effect on the motivation to participate in firm innovation (B = 0.643).Furthermore, as per the results of the ANOVA test in table---, the model is statistically significant with a p-value of 0.001 (p-value<0.05). Furthermore, the model explains 51.6% of the variance in the regression.

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Table 5

a

b

c

Model Summaryb

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .516a .266 .245 .37426

a. Predictors: (Constant), opinion

b. Dependent Variable: Participate

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression 1.826 1 1.826 13.037 .001b

Residual 5.042 36 .140

Total 6.868 37

a. Dependent Variable: Participate

b. Predictors: (Constant), opinion

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) .503 .212 2.372 .023

opinion .648 .180 .516 3.611 .001

a. Dependent Variable: Participate

4.8 Does employee demographics have an effect on their opinion of successful motivation techniques for firm innovation?For the purpose of this question, age and gender were taken an independent variables while the respondents’’ opinion on successfully motivation techniques for firm innovation, was considered as the dependent variable.Bases on regression’s results, depicted in Table --, both gender and age have positive impact on an individual’s opinion. With a coefficient of 0.154 age, is considered to have a stronger impact, furthermore with p-value of 0.018 the variable is statistically significant. Gender, however, not only has a weaker coefficient of 0.005 but is also statistically insignificant (p-value=0.964)Based on the R value (---) the model explains 39.1% of the variance in the regression, however based on the ANOVA test, the model must be deemed as statistically insignificant, however only by a slight margin.

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Table 5

a

b

c

Model Summaryb

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

1 .391a .153 .105 .32411

a. Predictors: (Constant), gender, age

b. Dependent Variable: opinion

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1

Regression .665 2 .333 3.167 .054b

Residual 3.677 35 .105

Total 4.342 37

a. Dependent Variable: opinion

b. Predictors: (Constant), gender, age

Coefficientsa

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1

(Constant) .797 .223 3.571 .001

age .154 .062 .393 2.491 .018

gender .005 .121 .007 .045 .964

a. Dependent Variable: opinion

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Table 6

a

b

c

5. Discussion 5.1 Demographic influence on innovationResults found that a significant proportion (93%) of the participant population is male, therefore the analysis and subsequent conclusion based on the data collected through the survey, is highly influenced by a male perspective. In terms of years of age, the population was divided amongst 4 categories. The 20-25 years of age category, Group A, represents those individual that have just joined the organization or are even possibly still studying and working part-time. The 26-30 years of age group, Group B, is assumed to represent the individuals who have been working for a firm for a short period of time, 3-5years- this group is also highly susceptible to the likelihood of a change in employment. Group C, 31-40 years of age, they have been working for the firm for a significant period of time, furthermore, it is highly unlikely that they will consider a change in employment. The 40+ years of age group, Group D represents individuals who can be considered veteran of the organization. It is also assumed that the age categories not only define which stage of the employment tenure, the participants are at, but also, a particular stage of their own individual life cycle. Results revealed that the population consisted primarily of individual from group A and C, both with equal number of representatives. This means that majority of the participants were either from the first stage of their job and professional life cycle or from the third. Those belonging to the first stage are individual who will be more inclined to show the organization their enthusiasm for participating in the firm’s innovation goals. They are also more like to be the ones instigating a change in the organization. Individuals belonging to the third stage are ones that have been working for the organization for at least 6-7 years, due to this they have a better understanding of the firms innovation goals and the reason for the need for innovation in the firm. Due to their “part of the family” type mind-set., it is highly probable that feel need for innovation themselves, in order to help the organization compete against up-and-coming competitors.

5.2 Individual motives for supporting firm innovationIncentives are one the key techniques used by organizations, to encourage employees to work to their maximum potential. With respect to the data compiled in the research, it was discovered that 87%of the participants received tangible incentives (Figure1), furthermore only 42% (Table 3) of the respondents were satisfied by the current incentive package offered by their respective organization. The 58% response (combination of those that had selected “No” and “Other”) of current incentive plan dissatisfaction, must be view as a red flag by organization, since job dissatisfactions is one of the principle factors that motivates employee to change firms.Further investigation revealed, that more than 50% of the percipients felt that there was a “Medium” level of motivation in the entire organizationIncentive is not the only technique that a firm can employ. Traditionally, employees who receive incentives based on their work performance are more motivated to perform. Based on this, from our participant population it was discovered that 67% felt their contribution to the organization, coupling this with the discovery that 76% of the participants were motivated to participate in the firms innovation, it leads on to the conclusion that contribution acknowledgment and innovation participation are related to one another. Furthermore, 21% stated that while they did not currently feel their level of contribution to the firm, they want to. This is a factor that organizations must not ignore as it implies that there is a strong relationship incentive or contribution based motivation to participate in firm innovation. This statement is supported by the discovery 68% of the respondents felt that incentives motivate them to innovate. 87% even stated that they felt that organizations with higher levels of motivation were more likely to be innovative. Coupling the two prior discoveries, we can determine that incentives combined with employee feeling that their contribution is acknowledged leads to a higher level of employee motivation; this in turn can result in a higher level of firm innovation.

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6. Conclusion and Implication

6.1 ConclusionThe objective of this research was to discover whether motivation helped an organization achieve a certain level of innovation. Based on the results of the analysis, certain conclusion can be made. First of it was discovered that employees not only valued the company’s incentive program but also valued the level of contribution, of their effort, in the company. Keeping that in mind it was also discovered that if employees are provided the right amount of encouragement, their goals will become aligns with the company’s. Therefore the research was able to conclude that combinations of monetary and non-monetary incentives are the best motivating factors to drive employees toward innovation. While the effect of employee effort acknowledgement may have proven to be small, it is still an important factor of firms to be considered, since it can help promote operational efficiency on a daily or weekly basis. This thus provides a clear picture of motives behind an individual decision to engage in an organization’s innovation goals and the type of incentives that help further encourage such activities.The research was thus also able to conclude that the true objective behind an organisational decision to start the innovation process at the individual level is to take advantage of the ripple effect of such techniques. The organization thus does not need to conduct extensive programs or workshops instil the concept of organization innovation into its employee. If an organization manages to convince its employee of the benefits of innovation, to both the organization and the employee himself, the organization will be able to achieve it innovation goals. It is also noteworthy that the research did not take into account the participant’s current position in the hierarchy of the organization. Given that all age categories were represented in the research, it is assumed that individuals from all levels of an organization have been represented by the study. Thus the conclusion about the importance of motivation at an individual level, is applicable all the employees of an organisation, from its CEO to a low-level employee. Thus organizations must focus their efforts on all employee categories. While this may sound like a tedious process, a firm may streamline its efforts by first identifying the levels, which lack in individual motivation, and then focusing on countering it.

6.2 Future implicationsIt is important to mention that innovation is paramount for an organization to operate successfully and continue to operate successfully. Taking into account the growing number of competitor, advancements in technology (which can also have a negative impact on an organization that does not wish to change) and the even the recent economic turmoil, firms ,regardless of which industry they belong to, must continue to strive towards efficiency and sustainability by way or modernization- in terms of operations and strategies.As highlighted by this research the first step towards achieving these goals is motivation at the individual level.

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APPENDIX 1 MSME Density across the World

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Appendix 2 Questionnaire survey form

University of Sussex QUESTIONNAIRE You may choose one or more answers.

1. What does the incentives plan at your work look like?

A) Tangible (Money, holiday, promotion, gifts)B) Intangible (Peer recognition, acknowledgement of achievements etc.) C) Other (Please specify):

2. Are you satisfied with the firm incentives plan?A) YesB) No

Your answer:C)

3. Do you think your firm is innovative?A) YesB) No

4. Would you like to take part at the firm innovation (strategies and means to increase the firm performance)A) YesB) No

Your Answer:C)

5. Do you feel your contribution to the company?A) YesB) NoC) No, but I want to

6. What is the atmosphere at your work?A) FriendlyB) RivalrousC) Confident

Your answer:32

D)

7. What is your preferred form of reward?A) Monetary IncentivesB) Non-monetary incentivesC) A combination of both

8. Do you think firm level incentives motivate you to be innovative?A) YesB) No

9. How would you rate the motivation level of employees at your workplace?A) HighB) MediumC) Low

10. According to you, is a firm with higher employee motivation more likely to be innovative?A) YesB) No

If yes then answer Q1111. According to you, what would be a better motivation strategy to encourage firms to

innovate?A) Monetary IncentivesB) Non-monetary IncentivesC) A combination of both

12. Age: _____

13. Gender: M/F

Thank you for your time!

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