Monday, August 17, 2015

How Performance Incentives Shape Individual Exploration and Exploitation: Evidence from Microdata

LEE Sunkee, MEYER-DOYLE Philipp
Read the working paper
INSEAD Working Paper 2015/58/STR revised version of 2015/25/STR

The existing literature has highlighted the role of individuals in exploration and exploitation, yet our understanding of what shapes those activities at the individual level remains limited. We integrate the literatures on exploration-exploitation and incentives, to examine how incentives impact individual behavior to explore new ideas or exploit existing ideas. We also explore how this impact is dependent on the capabilities of individuals and peer-related performance comparisons, and the implications of incentives on exploration performance. We make use of microdata on the commercial projects of sales employees at a South Korean ecommerce company to observe how a reduction in individual performance incentives shapes individuals’ exploration and exploitation behavior as well as their respective performance. We find that individuals engage in more exploration after a reduction in performance-based incentives; yet, interestingly, the increase in exploration is mainly driven by high-performing individuals. Further, the increase in exploration after the incentives reduction recedes when individuals underperform their direct peers. Finally, exploration performance improves after the incentives change, and such performance is particularly boosted for individuals who work in complex task environments. Overall, this study contributes to the literature on explorationexploitation by examining how individual exploration and exploitation behavior is shaped by performance incentives, and by uncovering factors moderating this impact. We also contribute to the incentives literature by investigating the implications of incentives on innovation, and the heterogeneous effects of identical incentives on different individuals. The study also provides insights into important microfoundations of firm capabilities and performance.