Can You Pay Employees to Innovate? Evidence from the Canadian Private Sector

Using 7 years of data representing the Canadian private sector, we estimate the effects of the major components of compensation on a rarely studied form of employee performance: innovation. Although there are some limitations inherent in the data, our results indicate the complex motivation required for consistent innovation success. Surprisingly, we find that fixed pay (salary) and individual performance pay have no effect on innovation, while variable group pay and indirect pay (employee benefits) have a positive effect. In other words, our results suggest that you can pay employees to innovate, provided that you select the right compensation incentives.