Management Control and Employee-Driven Innovation

Organizations increasingly empower their employees to conduct local experimentation and generate innovation ideas. The aim of this dissertation is to understand the role of management control mechanisms in motivating and managing employee-driven innovation. Specifically, I provide empirical evidence – both quantitative and qualitative – on the specific channels and mechanisms through which employee-driven innovation is facilitated within real-world settings. In the first chapter of my dissertation, I conduct a field study in a gaming company to examine how innovation ideas are generated and selected. I provide details on the various channels through which employee-driven innovation occurs, as well as the management control mechanisms used to manage employee-driven innovation. The rich descriptive evidence enabled me to uncover important themes in the management control mechanisms that balance innovation and execution. The second chapter is based on my job market paper (“Boss, Cut Me Some Slack: Control and Innovation in a Multitasking Environment”) which examines the problem of motivating innovation in the presence of existing execution tasks. Using employee- and project-level data from a software company, I examine the relationship between reduced time pressure on execution tasks and employee-level innovation by exploiting variations in the extent to which predetermined time constraints on execution tasks were loosely enforced by managers in decentralized teams. I find that reduced time pressure on execution tasks is significantly associated with a greater probability of self-initiated innovation. Consistent with theories on employee selection and relational contract, the above effect is more pronounced (1) for employees without significantly negative outcomes on past execution tasks, (2) for employees with a greater preexisting propensity to innovate, or (3) when the supervisor has a history of working with innovating employees. Conditional on submitting innovation prototypes, reduced time pressure on execution tasks is also significantly associated with higher-quality innovation. Despite the formal permission to innovate, many employees in established organizations seem unable to fully and effectively use the granted discretion to experiment. In the third chapter of my dissertation, I turn my attention to whether certain informal control mechanisms (such as social norms) affect the extent of local experimentation. Using detailed loan- and employee-level data from a financial institution that removed its rule-based formal control system, I analyze changes in decision-making patterns and find that employees who are exposed to two different initial control environments (i.e. before and after removing the rule-based control system) have both increased local experimentation over time after being given the right to make their own decisions. But employees from the initial control environment with zero-experimentation rely much more on managers’ or peers’ degree of experimentation to guide their own experimentation.