How To Structure Corporate Innovation for Success

Corporations looking to adopt a culture of innovation often take procedural and behavioral cues from Silicon Valley, but they overlook how startups compensate their innovative leaders. Traditional companies who truly want to innovate must have a conversation in earnest about innovation compensation.

Many large companies like to talk the talk on innovation – but few walk the walk when it comes to incentivizing it properly. These companies want to mimic the success and speed of the best startups, but they don’t also adopt the proven organizational and compensation structures that reward the risk taking and attract the top talent you need to make your biggest innovation bets successful.

Over the past ten years, many big corporations have made changes to their corporate culture to become more innovative. This change has been inspired by disruptive startups whose ability to quickly capture market share in all industries forced traditional incumbents to adapt. In the early 2010’s, companies like Coca-Cola and General Electric opened startup incubators within their organizations to fund new projects and ideas before those ideas had even been proven. The corporate-startups influenced corporate culture as well. According to Fortune, General Electric CEO Jeff Immelt “turned his dining room into what the company calls an innovation hangout, with Ikea couches and high-top tables, and whiteboards.”

Limitations of corporate-startups: culture and compensation

Coca-Cola’s Lean Startup and GE’s FastWorks were both corporate-startup initiatives that were launched in 2013 and are now defunct (ending in 2016 and 2017, respectively). At the time, the promise of the partnership was clear. The corporation could offer its startup resources, seed funding, runway, mentorship, marketing, and early credibility. The startup offers the corporation a chance at explosive growth through a brand new, modern revenue stream, and a licensing agreement to new tech that competitors don’t have access to.

However, the cultural divide between a corporation and a startup proved insurmountable. As David Butler, Coca-Cola’s former VP of Innovation put it, albeit then optimistically, “When the [startup and the corporation] combine, it’s quite interesting. You need a translator to help them understand what’s going on. That’s why a lot of platforms inside big companies fail and you have to take the time.”

In retrospect, the work of the startup-corporate translator may have been a doomed task from the start. But the problems of corporate-startups extend beyond the cultural. A lack of true innovation compensation undermines the entire effort as well. So far the corporate innovation renaissance seems to rely on mimicry of startup culture, but not startup pay or incentives, thereby missing the allure that attracts most entrepreneurs in the first place: big risk, big reward.

So far the corporate innovation renaissance seems to rely on mimicry of startup culture, but not startup pay, thereby missing the allure that attracts most entrepreneurs in the first place: big risk, big reward.

That said, we’re aware of the fact that plenty of corporations have tried to incentivize innovation within their company, only to find trouble. Performance-based bonuses and profit-sharing stakes lead to jealous and disgruntled employees from other departments who resent the special attention, and money, given to the innovation unit, i.e., the start-up within the corp.

Perhaps the problem lies in the very notion of nestling a startup within a traditional company. The two are ill-suited from a perspective of culture and compensation. However, by spinning out the internal startup into an external entity, a traditional company solves these very problems.

Spin out your innovation

By separating the two companies, the startup is protected from the traditional corporate culture that (hopefully) hums like a machine but has little tolerance for an innovator to throw in a wrench. In fact, Conde Nast’s original acqui-hire of Reddit almost strangled the platform to death. It wasn’t until Advanced Publications (owner of Conde Nast) spun out Reddit that the content platform finally thrived.

Notably, Coca-Cola has moved towards the Advanced Publications-Reddit model in recent years. The Bridge by Coca-Cola (in partnership with Mercedes-Benz and Turner). Coca-Cola and its partners provide promising startups with marketing, mentors, and business resources in exchange for a chance to license the startup’s product to the companies or their partners. The program does not require any equity from the startups.

However, this puts Coca-Cola, Mercedes-Benz, and Turner in the position of waiting for a good platform to emerge, with little input in what ideas to pursue. Furthermore, if a startup becomes a (gasp) unicorn, the corporations have no stake in the startup and no upside in the long term, thereby not strengthening its core business with a platform business revenue stream.

Traditional companies would be better served looking for problems to solve internally, then hiring the right talent and spinning out a separate entity tasked with solving that problem innovatively. In a sense, it’s R&D, but with a startup twist that turns the most promising R&D unit into its own spun out startup.

Traditional companies would be better served looking for problems to solve internally, then hiring the right talent and spinning out a separate entity tasked with solving that problem innovatively.

Incentivizing innovators, without causing jealousy and frustration

The new startup would also have its own capitalization table and compensation scheme that can better incentivize innovators. As founders of the new startup, initial employees would be vested in the company and thereby incentivized in ways that align with the major shareholder, the corporation.

Typically, when corporations seek to incentivize innovators internally, they turn towards schemes like generous profit-sharing packages and bonuses that are intended to mimic the equity-stake of founders in Silicon Valley. However, these incentive packages often leads to jealousy and resentment from corporate employees in other departments. By spinning out the project into its own company, the compensation package is removed from corporate structure entirely, thus diminishing the possibility of jealousy from employees in other internal units.

Moreover, by aligning culture and pay to entrepreneurs’ expectations, the corporation will be able to recruit greater talent.

By spinning out the project into its own company, the compensation package is removed from corporate structure entirely, thus diminishing the possibility of jealousy from employees in other internal units.

Of course, the choice to spin out a solution to an internal problem can be a difficult one that requires steady and judicious leadership. The startup cannot exist without the go-ahead from the corporation’s top management, along with generous funding to seed the startup. Thus to even get the ball rolling, the corporation’s CEO must be properly incentivized to make these types of risky decisions.

Start at the top: innovation leadership

We’ve written before about how CEOs should be compensated in the long term for taking risks on innovative projects. While they won’t be the innovators directly working on the project, their greenlight comes with mix of great personal risk and foresight.

In terms of personal risk, CEOs are on increasingly shorter leashes, with tenures averaging around 5 years. Their incentives and priorities are short term, and lackluster financial reports or disappointing growth feel urgent to shareholders who hold the CEO’s fate in their hands. Prioritizing digital transformation and business model innovation above knock-out financials quarter-after-quarter would be the smart play (straight from the Jeff Bezos handbook), but boards rarely have the stomach for a financial roller coaster.

If a board truly wants long term innovation, they need to give the CEO two things: real permission to take risks and not worry too much about this year’s earnings (i.e. new priorities), and long term stake in the new innovative project.

Other top-level executives – who also have real opportunity costs in how they allocate their time and focus – that are closely involved with the new business should similarly be compensated. If you don’t properly align their incentives with the goal of new business model innovation, you’re setting your new initiatives up for failure.

Good judgment that reaps dividends for shareholders for decades should reward the people who made that good high-risk bet. By spinning out a startup with its own capitalization table and board, the CEO and top executives can also be more heavily vested in the startups success without diluting corporate shares. Furthermore, these executives should also play a role on the startup’s board to ensure the corporation’s strategic needs are met, without overplaying their hand in the startups day-to-day operations.

As an added bonus, a good executive team who is properly rewarded for good decisions may also be incentivized to stick with the company for the long haul.

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Filed under: Innovation Leadership | Topics: acquihire, change agent, corporate innovation, corporate VC, enterprise hacks, innovation champion, innovation culture