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Motivating Creative Employees Calls for New Strategies

May 1, 1994
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Related Topics: Recognition, Compensation Design and Communication, Motivating Employees, Featured Article
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Susan Baker spends her days in a research lab, identifying molecules in the human body that are capable of fighting disease. Once the molecules are identified, she begins the laborious process of developing synthetic substitutes for those molecules that can be used in disease therapy.

As a senior research associate with Synergen, a biotechnology firm in Boulder, Colorado, it's the science that excites her. Where she works is important, but not quite as important as the work itself. In fact, as a molecular biologist, her skills are in demand from other companies.

Baker is different from the average employee. She, along with other creative professionals such as engineers, software developers and researchers, are what IBM founder Thomas Watson calls "wild ducks." Wild ducks aren't motivated by such traditional incentives as title and promotion. They seek creativity, the freedom to innovate and recognition for their scientific breakthroughs. Furthermore, they're apt to be more committed to their discipline than to any particular firm. Given the right enticement, wild ducks will fly to other companies, taking their talents with them and leaving half-completed research projects behind.

To recruit and retain technical employees, companies increasingly are reviewing the way they reward and recognize them. Some organizations are developing royalty compensation plans, whereby key research and development personnel are given the right to participate in the commercial success of the products they create. By sharing a percentage of profits with key contributors, these companies are hoping to jump-start the creativity and productivity needed for successful product commercialization.

Royalty compensation gives monetary feedback on employees' success.
For decades, U.S. companies—leaders in inventing new technologies—have had trouble in the commercialization of their inventions, in finding ways to use them in products that are useful in the marketplace. David Balkin, assistant professor of business administration at the University of Colorado, says that one reason U.S. employers have done such a poor job in product commercialization is that technical employees often feel their contributions aren't adequately rewarded. "A research scientist for a large pharmaceutical corporation develops and patents a successful new drug that produces $100 million in revenue its first year on the market," he explains. "The executives of the division receive large cash bonuses, and the salespeople enjoy windfall commissions from the strong demand for the new product—but the scientist receives only a $500 honorarium for developing the drug."

"Royalty payments are definitely on the upswing. We're starting to feel the success of this program."
Carol Dudick,
Battelle Laboratory

Since the 1950s, both Japan and Germany have recognized that employee-inventors should be compensated based on the value of their inventions. But U.S. policy has remained heavily focused on creating new technologies, devoting relatively little attention to adopting and applying them. In the public sector, this began to change in 1986, when the Federal Technology Transfer Act mandated that employee-inventors working in federally funded research laboratories be granted a royalty of at least 15% of any licensing income the laboratory receives. "It is estimated that more than 100,000 scientists and engineers—one-sixth of the total in the United States—are involved in such research," says John McMillan, managing director of Houston-based William M. Mercer, Inc.

At Battelle Pacific Northwest Laboratory in Richland, Washington, a royalty compensation program has been in place since 1989 for employees involved in both government-sponsored research and private research projects. The program was developed partly in response to the Congressional mandate, but also because managers wanted to incent staff members to work harder at transferring technology to private clients. When Battelle's researchers develop technologies that are licensed for use by private industry, the organization receives licensing fees for that technology, as well as royalties on any products manufactured using the technology. Carol Dudick, manager of technology commercialization, says that key researchers are entitled to share a pool of funds worth 10% of gross royalties or other proceeds derived from licenses and sales of intellectual property.

In the last three years, Battelle has paid approximately $200,000 to key contributors through its royalty program, but Dudick says that payouts in the first six months of 1993 equaled payouts in all of 1992. "Royalty payments are definitely on the upswing," she says. "We're starting to feel the success of this program."

Another government contractor, SRI International in Menlo Park, California, has had a royalty plan since 1978, long before such plans were required legally. Here, scientists share a pool of funds worth 25% of license and royalty fees. Because of the long research time needed to come up with commercially useful technology, only about 5% to 10% of SRI researchers ever have received royalties. When they do, however, payments can be enormous, as was the case with one scientist who developed software to enhance ultrasound imaging. He's earned more than a million dollars, and the checks keep coming.

Other compensation plans are more common—and less effective.
Despite the enormous potential of royalty compensation, only about 7% of companies currently offer such project-oriented incentives, according to a 1992 survey by William M. Mercer. "In this country, the first thing a new engineer or programmer is presented with is a document in which the engineer agrees, 'I am an employee of the corporation and anything I develop while employed here belongs to the company,' " says McMillan. "This illustrates the way American corporations think and the way technical employees have been taught to think. It's appropriate that the company owns the invention because the company provides the salary and covers research costs, but this concept has gone too far. It'd be in the company's best interest to provide an incentive based on what the individual actually comes up with."

Currently, companies are more likely to recognize technical contributors with financial bonuses based on a percentage of the inventor's salary. According to a survey by the Hay Group, a management-consulting firm, 76% of high-tech companies have some kind of special pay policy for key technical people, including bonuses that can be quite substantial.

At Dallas-based Texas Instruments, an inventor can receive up to $175,000 in bonuses for a single patent, although these large awards are extremely rare. Monsanto Corporate Research in St. Louis awards employees $50,000 for significant "lifetime" achievements. And IBM gives Outstanding Innovation Awards for important inventions or scientific discoveries. Ranging from $2,500 to $25,000, about 40 of these awards are given each year.

So does this type of profit sharing accomplish the same thing as royalty compensation? Some plans may, but for the most part, McMillan is doubtful. "Most company bonus plans are set up on the basis of profitability, and company profits today reflect products that were developed years ago. This doesn't reflect the efforts of R & D people who are working there today." And what about variable pay plans, where team members receive a bonus based on their department's financial performance? Hoyt Doyel, principal of Effective Compensation Inc. in Lakewood, Colorado, says that these are too small to significantly incent technical employees: "The 3% and 4% variable pay programs just aren't effective."

McMillan supports royalty compensation programs, despite their limited rate of use so far. "The reason they are not more widely used is that there are a lot of other issues [these programs] get saddled with," he says. Among the questions employers must answer are: What are we trying to incent? What percentage of profits should be returned to employees? How do we determine who's eligible? And what kind of message will this send to employees who don't receive royalties? Yet, McMillan says, "the advantages far outweigh the disadvantages."

Royalty compensation encourages marketplace sensibility and engages talent.
Because technical employees are hired more for their creativity and specialized knowledge than their business acumen, in the heat of discovery, they may sometimes forget the bottom line. "One of the big problems in research, engineering and software development is the fact these employees want to be very professional and create the most perfect product or system technically possible, whether or not that is what the market wants," McMillan says. "But by basing the incentive not on an invention's technical elegance, but on its commercial acceptance, you get the developer to focus on what the customer really wants."

McMillan adds that because employees see no royalty checks until products actually are sold, they're that much more likely to try to get the product out the door quickly. "This way, you have engineers and developers aligned with management's time schedule and agenda," he says.

SRI's Dan Morris, director of technology marketing, agrees that royalties can give a tremendous boost to the work flow. "The royalty program plays a significant role in incenting productivity," he says.

"By basing the incentive not on an invention's technical elegance, but on its commerciality, you get the developer to focus on what the customer wants."
John D. McMillan,
William M. Mercer, Inc.

BMC Software in Sugar Land, Texas, has found its royalty compensation plan so successful in incenting product development that it won't even talk about the program publicly anymore. Two years ago, the firm stated in its annual report that it had paid $4.9 million in royalty compensation and that some individual programmers were earning more than $1 million per year because the products they developed were so profitable. "We view compensation as an important part of our success," explained a company spokesperson, "but we'd rather not do interviews on this subject. It's very sensitive." Put another way, BMC's royalty plan has become a competitive trade secret.

Other companies have found royalties an effective way to encourage company loyalty among fickle technical employees. Micrografx, a Richardson, Texas-based software company, sets aside 2% of gross revenues for employee royalty payments, explains Ed Morgan, vice president of human resources. However, these payments stop if an employee takes a job with another firm. What's Micrografx' turnover rate? "Very, very low," Morgan says.

Support royalty compensation with appreciation and room to explore.
Although royalty compensation is a big aid in attracting and retaining creative professionals, HR managers at organizations that provide such royalties are quick to emphasize that it isn't just money that gets technical people excited about their projects, as exciting as money can be. Recognition programs and an atmosphere conducive to creativity are also important.

At Battelle, for instance, a lot of value is placed on recognizing employees at its annual black-tie gala. Here, employees who've acquired patents, copyrights or awards from the Federal Laboratory Consortium are recognized by the organization. "It's a prestigious event, with videos highlighting the work of the award winners," Dudick explains. "It takes a lot of pats on the back to get a commercial license agreement. This is one of them."

Morris agrees that recognition is important for technical personnel. "Most scientists are driven by their need to discover and then get praise and recognition for those discoveries," he says. But at SRI, Morris adds that the atmosphere and culture of the organization itself goes a long way toward incenting productivity. "Ours is a campus-like atmosphere in which scientists can explore whatever science interests them, provided they're seeking useful applications for that science. We give them lots of freedom."

Another way to keep technical people motivated is by giving them the technology and resources needed to perform cutting-edge research. Somebody once said that pilot Chuck Yeager stayed in the Air Force because he loved to fly experimental new aircraft but couldn't afford to buy his own. Many technical employees feel the same way about research technology.

At SRI, for instance, 35% of funds from license and royalty fees goes to the department where the technology originated. This money often is used to buy additional laboratory equipment, something that many technical employees consider to be as much a reward as money.

"You can attract these people just by promising to fund one of their pet projects," says Terrence Brown, assistant vice president of Compensation Resource Group Inc. in Pasadena, California. "Give them the toys they need to continue the projects they're interested in."

Monsanto realizes the motivational value of new lab equipment, but the organization doesn't invest in these resources for just anybody, explains Denise Cooper, manager of HR. "They have to prove themselves before we outfit them with toys," she says. "We don't communicate this as an official form of recognition, but in an underground way, employees regard this as a reward for good work."

Such companies as 3M, based in St. Paul, Minnesota, and Eastman Kodak in Rochester, New York, take this idea a step further, setting up innovation banks to fund special projects. Balkin says: "This not only allows a large venture to be supported inside the company as a separate business, but it also permits scientists and engineers to obtain resources that otherwise would find no place in a line manager's budget."

Another way to recognize technical excellence is through the creation of career paths tailored to these workers. In the past, for technical employees to advance in an organization, they had to leave their jobs in the laboratory and move into managerial positions for which they may not have been suited. While chasing paper and managing subordinates, their creative talents atrophied or became outdated. With technical career paths, however, employees can advance while remaining in a technical capacity. Ultimately, this is much more beneficial to the employee and the organization.

A recent survey conducted by Training and Development Magazine revealed that effective dual career paths are those that consistently reward technical workers with status, salaries and incentives that compare favorably with those enjoyed by managers. Furthermore, technical-career-path systems thrive in organizations that are committed to helping technical people assess their interests, preferences and strengths so that they can make informed career choices.

Microsoft in Redland, Washington, is among the many large research-dependent organizations that have implemented technical career paths. As Tom Corbett, a developer with 10 years' experience at Microsoft, explains, "There's never been any motivation for me to go into management because of better compensation or more influence." The high regard Microsoft has for its developers is one of the main reasons the company is at the top of the software industry in the United States.

So when it comes right down to it, it isn't just money that motivates technical employees. It's recognizing their needs and their need for recognition. Still, there is a place for royalty compensation. "Where these plans are used, they work very, very well," McMillan says. In terms of recruitment, productivity, product commercialization and employee retention, the royalty system can be a strategic tool in developing the type of technical employees that U.S. businesses need in today's marketplace.

Says Doyel, "I look at what gets people excited in this country and it's lotteries—the $86 million kind of thing. For compensation to get people excited and willing to work hard, there has to be some real potential for earnings. Royalty programs are the closest thing we have to lotteries."

Personnel Journal, May 1994, Vol.73, No. 5, pp. 103-106

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