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

Abstract

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. Using novel microdata on the commercial projects of sales employees at a South Korean e-commerce firm, we find that individuals engage in relatively more exploration when performance-based incentives are weakened; yet, interestingly, this increase in exploration is driven mainly by high-performing individuals in our setting. Weakening performance-based incentives also lead to higher exploration performance via experiential learning, especially for individuals who work in complex task environments. Overall, this study contributes to the literature on exploration/exploitation by examining how individual exploration and exploitation behavior and performance is shaped by incentives. We also contribute to the incentives literature by investigating the implications of incentives in an important domain, namely, that of knowledge exploration behavior. This study also provides insights into important individual-level microfoundations of firm capabilities and performance by highlighting the important role of individuals in exploration/exploitation activities and how this role is contextualized by the incentives a firm deploys.

How does it feel and how does it look? The role of employee motivation in organizational learning type

“…Moreover, given that several control variables are significant and relevant predictors of exploration versus exploitation, the additional variance explained indicates independent variables' relevant effect sizes. Although considerable work remains to uncover the other relevant antecedents of exploration versus exploitation, the incremental contributions of our predictors bear comparison with those reported in similar studies (e.g., Grant & Mayer, ; Lee & Meyer‐Doyle, ). Figure a indicates that the self‐enhancement motive is practically relevant for how employees balance exploration and exploitation, as its increase is associated with the shift of balance from exploration to the predominance of exploitation.…”

“…Second, by specifying how different forms of employee motivation are linked to the balancing between explorative and exploitative activities, we extend current theorizing regarding the role of their individual‐level predictors. Although recent studies have examined how organizational and network characteristics influence employees' explorative versus exploitative activities (Lee & Meyer‐Doyle, ; Rogan & Mors, ), little is known about how differences between individuals may relate to balancing between exploration and exploitation. Our results extend the organizational learning literature to encompass the effects of employee motivation on explorative versus exploitative activities.…”

“…However, there are other forms of motivational factors that are potentially important for exploration versus exploitation. For example, researchers have noted that organizational concerns and prosocial motivation (Rioux & Penner, ; Takeuchi et al, ) and extrinsic incentives, such as money (Kaplan & Henderson, ; Lee & Meyer‐Doyle, ), can be important determinants of employees' effort level as well as the type of goals and activities that employees seek to pursue. A particularly interesting avenue for future studies is to explore how various types of motivation interact to influence employees' exploration versus exploitation.…”

“…Shedding more light on individual-level exploration/exploitation provides a meaningful extension to organizational learning research because organizational learning is, in essence, rooted in the behaviors of individual employees (Levinthal & March, 1993;March, 1991;Raisch et al, 2009). Moreover, whereas organizational learning theory suggests that exploration and exploitation at the individual level are the opposing ends of a single continuum (Gupta et al, 2006;Lavie et al, 2010;March, 1991) explorative versus exploitative activities (Lee & Meyer-Doyle, 2017;Rogan & Mors, 2014), little is known about how differences between individuals may relate to balancing between exploration and exploitation. Our results extend the organizational learning literature to encompass the effects of employee motivation on explorative versus exploitative activities.…”

“…This contention receives support from neuroscience research, which has demonstrated that individuals indeed make a trade‐off between explorative and exploitative demands, resulting in a zero‐sum game between these activities (Laureiro‐Martínez, Brusoni, & Zollo, ). As individuals face a trade‐off between exploration and exploitation, we follow earlier studies (e.g., Lee & Meyer‐Doyle, ; March, ; Rogan & Mors, ) and regard organizational learning activities as falling on a continuum anchored by explorative activities at one end and by exploitative activities at the other end. It should be noted that this is not to say that individuals may not attend to both explorative and exploitative activities across time and situations.…”