Friday, March 27, 2015

How Performance Incentives Shape Individual Exploration and Exploitation: Evidence from Micro-data

LEE Sunkee, MEYER-DOYLE Philipp
Read the working paper
INSEAD Working Paper 2015/25/STR

We integrate the literatures on exploration/exploitation and incentives, to examine how performance incentives impact individual behavior to explore new ideas or to instead exploit existing ideas. We also investigate how this impact is dependent on the capabilities of individuals and peer-related performance comparisons, and whether the change in individual search behavior is random or intelligent. We use micro-data on commercial projects of sales employees at a South Korean e-commerce company to observe how different incentive regimes shape individual behavior to explore/exploit and individual performance. We find that individuals engage in more exploration after a reduction in performance-based incentives, yet, interestingly, the increase in exploration is largely driven by high-performing individuals. Further, the increase in exploration recedes whenever an individual underperforms their direct peers after the incentive reduction. Finally, we find that the increase in exploration following the incentive reduction is intelligent and not random, such that the performance generated by explorative ideas increases following the incentive change. Overall, this study makes a contribution to the literature on exploration/exploitation by examining how incentives steer search behavior, and by exploring the heterogeneity in this effect. Further, the study also provides insights into important micro-foundations of the resource-based view.sales employees at a South Korean e-commerce company to observe how different incentive regimes shape individual behavior to explore/exploit and individual performance. We find that individuals engage in more exploration after a reduction in performance-based incentives, yet, interestingly, the increase in exploration is largely driven by high-performing individuals. Further, the increase in exploration recedes whenever an individual underperforms their direct peers after the incentive reduction. Finally, we find that the increase in exploration following the incentive reduction is intelligent and not random, such that the performance generated by explorative ideas increases following the incentive change. Overall, this study makes a contribution to the literature on exploration/exploitation by examining how incentives steer search behavior, and by exploring the heterogeneity in this effect. Further, the study also provides insights into important micro-foundations of the resource-based view.