The Kellogg Insights from Kellogg School of Business has an article justifying Bonuses Despite Billion Dollar Bailouts:
Eisfeldt and Rampini’s research suggests that their function is less about the past than the future. Bonuses provide managers with an incentive to be honest about their own performance and about the firm’s prospects earlier rather than later, when shifting capital to more productive managers and more productive uses can have the greatest impact.
Clearly, large bonuses in failing financial institutions is a touchy subject and I would like to stay away from it. However, there is definitely a case for rewarding failure in R&D. If all R&D efforts are successful, than the organization is not taking large enough risks and would likely not be able to compete long-term. Managers need to drive a healthy risk appetite, while managing overall exposure. Furthermore, if failures are not exposed early, more money is normally wasted in keeping wasteful projects alive. It also means that the R&D culture is not accepting of failure and that is a dangerous path.
One effective approach to encouraging/managing risk is to tie some fraction of executive compensation to “Wasted Development Effort.” The idea here is to recognize that some R&D should fail and that the executives should be encouraged to talk about it. If the term wasted development effort does not sound appropriate, consider Technology Path Elimination. My boss a few years ago came up with this term and it sounds much better: Encouraging R&D organizations to eliminate technology paths that will eventually lead to failure. Thoughts?