Page 172 - ENTREPRENEURSHIP Innovation and entrepreneurship

53231_Innovation and Entrepreneurship.qxd 11/8/2002 10:50 AM Page 165

The Entrepreneurial Business 165

Indeed, the compensation scheme that is most popular in large busi-
nesses, one based on return on assets or on investment, is a near-com-
plete bar to innovation.
I learned this many years ago in a major chemical company.
Everybody knew that one of its central divisions had to produce new
materials to stay in business. The plans for these materials were there,
the scientific work had been done … but nothing happened. Year after
year there was another excuse. Finally, the division’s general manag-
er spoke up at a review meeting, “My management group and I are
compensated primarily on the basis of return-on-investment. The
moment we spend money on developing the new materials, our return
will go down by half for at least four years. Even if I am still here in
four years time when we should show the first returns on these invest-
ments—and I doubt that the company will put up with me that long
if profits are that much lower—I’m taking bread out of the mouths of
all my associates in the meantime. Is it reasonable to expect us to do
this?” The formula was changed and the developmental expenses for
the new project were taken out of the return-on-investment figures.
Within eighteen months the new materials were on the market. Two
years later they had given the division leadership in its field which it
has retained to this day. Four years later the division doubled its prof-
its.
In terms of compensation and rewards for innovative efforts, how-
ever, it is far easier to define what should not be done than it is to spell
out what should. The requirements are conflicting: the new project
must not be burdened with a compensation load it cannot carry, yet
the people involved must be adequately motivated by rewards appro-
priate to their efforts.
Specifically, this means that the people in charge of the new proj-
ect should be kept at a moderate salary. It is, however, quite unrealis-
tic to ask them to work for less money than they received in their old
jobs. People put in charge of a new area within an existing business
are likely to make good money. They are also the people who could
easily move to other jobs, either within or outside the company, in
which they would make more money. One therefore has to start out
with their existing compensation and benefits.
One method that both 3M and Johnson & Johnson use effectively is
to promise that the person who successfully develops a new product, a
new market, or a new service and then builds a business on it will
become the head of that business: general manager, vice-president, or