Rewarding on Effort vs. Outcomes

Overview

A number of months ago a CEO I advise asked me my opinion about an interview with Sundar Pichai he listened to. The interview and subsequent article is about rewarding on effort not outcomes to stimulate innovation. Of course this was the opposite of what I had been encouraging this CEO to focus on with his team, so he wanted me take on Sundar’s viewpoint.

Article: https://www.gsb.stanford.edu/insights/sundar-pichai-reward-effort-not-outcomes

Following is an abstract from the memo I sent on this topic

Encouraging Innovation

The quote from the interview that has triggered the discussion is in the subheading “You have to encourage innovation. Companies become more conservative in decision making as you grow… be okay with failure and reward effort, not outcomes.”.

It is interesting that this is the focus and title of the article given that this was only one point of conversation between Sundar and the interviewer. In fact it seemed like, although the interviewer acknowledged this thought, he glanced over it. The statement is so contrary to what we understand to drive behavior in an organization that I wish the interviewer had picked up on it and went deeper into it. But he didn’t.

My thoughts

It would appear Sundar’s insight is about leadership under uncertainty. He is presenting a way to manage individuals and lead an organization where novel ideas are required for success. In context his quote about reward effort, not outcome is around product innovation, fostering innovation and making it acceptable to take risks and fail. In the early days of a Start-up, trying and experimenting are often the route to a successful business, and his desire is to find a way of maintaining that “try and experiment” culture.

But, it seems to me that the point he is making is not that outcomes are not important, they are. But they measure defined success. As companies grow and scale, rewarding people on outcomes keeps them aligned, measured and incentivized to protect and grow the existing business around what we agree or know to be success.

One of the reasons outcomes can be used is because the definition of success is defined — the destination and often the strategy to get to that destination are so well defined the outcomes are designed simply to align the team around successful execution. There could be an argument that as companies get bigger these outcomes are driving short term behavior (protect and grow what you know) and foster conservative decision making (i.e. risk aversion).

When the Destination is not known

But what about when the destination is not known? What about looking beyond your existing business? How do you create an environment where you can create new ways of thinking, experimentation and even creation of the very “Start-ups” that could displace your existing business? This appears to be his point. To foster innovation someone needs to be incentivized to be thinking about your future business? Success may not be defined by what we know but rather by experimentation, which will result in an increase in “outcome” failure.

The challenge for any company that gets large in scale is keeping the innovative culture that made it successful as a start-up. Sundar’s perspective is that to keep this innovative culture you also need to reward those that made the effort but “failed” (as defined by a business outcome). If you do not you will reward the people who take the simple shots and succeed and don’t reward those who take the long shots and fail, out of the window goes your culture of innovation as everyone tries to play safe and within the boundaries.

If you really want to build an innovative culture, one where people strive to think and break boundaries, they need to take the long shots and some (or possibly many) of those shots will fail.

So, my thought is that this is not an “or” question (outcome or effort) but an and question. If failure and innovation are “bed mates” then how do you at the very least not penalize failure? Is it solely by rewarding effort? Or is there another way to breed innovation?

Thanks for reading. I’m John McAuliffe and I help companies accelerate growth more consistently and with greater predictability.

I am a learner. I find myself constantly reading on a variety of topics with an insatiable appetite for continuous learning. My thoughts on business have been influenced by many. You may feel a bit of déjà vu in reading some of my thoughts because of this. When it comes to strategy and business management systems I follow the likes of Jim Collins, Roger Martin, Gino Wickman, Verne Harnish amongst others. On consumer insights, marketing and sales I am influenced by the likes of Adele Revella, John McMahon, Geoffrey Moore and many others. Thanks for reading.