Table of Contents
Managing R&D in Knowledge Economy--Dynamic and Portfolio
incentive’
Qingmii Xu Caozhi Xu,Shougin Shen, Fuhui Jia
Research center of innovation and development, Zhe Jiang university, China
Abstract: To improve the performance of R&D, the important issue ¢ managing
R&D is how to motivate the staff of R&D department. Based on dynamic and
portfolio incentive, the paper builds the incentive model of system dynamics, and
simulate through the different portfolio incentives and different stages of companies
evolution. Authors suggest some new portfolio methods according to different period
of career development and companies evolution. The paper also provides some
suggestions about how to balance the portfolio incentive to improve the value of
intellectual capital.
Keywords monetary incentive, nonmonelary incentive, portfolio incentive
1. Model construction
In the science of economics and management: performance=F (competency,
incentive), that is, an enterprise's performance is a function with competency and
incentive. Supposing the competency is constant, if effective incentive mechanism is
adopted, an enterprise’s performance can be improved. Under this circumstance, the
incentive mechanism is primarily to satisfy employees’ needs and increase their
utilities. Therefore, their working enthusiasms can be stirred up and the degree of
their engagement in work can be increased. In the end, an organization's performance
is improved. The incentive mechanism based on skill can improve employees skill,
that is to say, the incentive mechanism based on skill is according to the amount of
skill employees have and the promotion of their skill to motivate employees. So it can
motivate employees to be trained and strengthen their learning enthusiasm. Finally,
employees’ faculties are promoted greatly, which improve the organization's
performance.
Figure 1 shows that the reasonable portfolio incentive of moretary incentive and
nonmonetary incentive can satisfy employees’ incentive utility, stir up their working
enthusiasm and exploit their latent thoroughly. Therefore, an enterprise’s performance
can be improved; at the same time, with the improvement of an enterprise’s
“The paper is supported by CNSF
performance, more moretary incentiveand nonmonetary incentive will be adopted.
On the other hand, the incentive system based on skill can encourage employees to
learn and train themselves, which can improve their competency and then promote the
enterprise’s performance. The improvement of the enterprise’s performance enables it
to invest more money in the training programs in tum.
y
Monetary incentive
Nonmonetary >| employee
Incentive
satisfaction ad i
incentive
Skill-based |] employecee |! competence
pay
rt
Figure 1@the basic logical structure of model
expect _conpet ency
achi venent,
Learning .
nati vation | earning
culture
Skil
based pay
i ncenti ve
other cost
snanet ar y
incentive
leadership Profit
partici pation x
enpl oyee
satisfaction
culture sale
roti vat on
salary stock industry
envi ronnent
Figure 2: cause-effect basic structure of portfolio incentive
2. Examination of the models effectiveness
To simulate and analyze effectively, it is necessary to test the model's
effectiveness and rationality, which is the necessary guarantee to keep the accordance
between the model and the true action in the real system. The model's rationality is
that the model’s structure can embody perfectly the characters of the real system; the
effectiveness is that the fitness between the model’s action and the true action in the
real system. The model's effectiveness determines its rationality, and a good model’s
structure is the premise to imitate action effectively. As to the model's rationality, the
models structure and its intemal relations have been considered thoroughly during
the construction of model. So, we will identify primarily the model's effectiveness in
this section.
We use the data of a high-tech company (call it A company in the followings) in
1994 as the initial value for this imitation and four factors (sales@profit@productivity
and the number of employees) as the parameters for this imitation. We compare the
fitness between the simulation value and the true value, and then test the models
effectiveness.
According to the four indexes of A company (the sales @profit @productivity and
the amount of employees) from 1994 to 2001, showed in the Table 1, and the
comparison between the fitted value and the true value, we can see that the results of
imitation are relative satisfactory, and the error of fitting $ within 5% which can
indicate that the simulation is good. Therefore, the model in this article is reliable and
effective.
Table1@compare simulation value and true value@1994€>2001@
oo 1994 | 1995 | 1996 | 1997 | 1998 | 1999 2000 | 2001
Sale true 15.5 | 28 432 [495 [594 | 74 77.14 | 83.99
@0.1billion® | simulation [13.3 | 275 | 423 [481 [584 [724 785 | 855
Enont@) | 16 15 14 38 18 22 il 18
profit true 061 [3 31 45 33 3.99 3.78 | 2.07
@0.1billion® | simulation | 0.62 | 31 3 46 34 41 3.9 2.01
Ero(@) | 18 33 33 22 31 25 3 3
productivity | tue 824 | 115 143 178 203 228 255 288
@nillion/p® | simulation | 81.4 110 140 175 201 224 250 292
Eront@) | 13 46 18 17 1 13 2 14
Numberof | tue 2373 | 2576 | 3020 | 2768 | 2926 | 3248 3024 ‘| 2911
employees | simulation | 2373 | 2555 | 2912 | 2725 | 2897 | 3200 3060 ‘| 3005
Enot®) | 0 1 36 16 24 15 13 32
3.Policy analysis of the model
31 The influence on an enterprise's performance resulted from the portfolio
incentive mechanism of the monetary and nonmonetary incentive
When designing the incentive system, it is important for an enterprise to combine
effectively the monetary and nonmonetary incentive. An enterprise should not
emphasize too much on either of them, but should pay attention to the coordination
between them. Only by this way, the good incentive effectiveness can be expected.
Both monetary and nonmonetary incentives obey the law of diminishing marginal
incentive utility, that is to say, when one incentive method is increased, its utility will
diminish marginally. At this time, in order to reduce the incentive costs and increase
the incentive utility, another incentive method should be adopted.
In addition, in the different stage of an enterprise’s evolution, the manner of the
portfolio incentive is also different, and there are dynamic games between the
enterprise and its employees. Incentive certainly can stir up employees’ enthusiasm
and their engagement in working, which bring out the enterprise’s good performance,
but the incentive strength depends on the enterprise’s performance. If the incentive
intensity is too strong, it will affect an enterprise's further development. So an
enterprise should combine effectively the monetaryand nonmonetary incentive and
then reach a bi-win situation between the enterprise and its employees.
This model scores based on estimating the importance and intensity of the
concrete incentive means including monetaryand nonmonetary incentive. We score
10 to the total intensity of the monetary and nonmonetary incentive, however, in the
true results, the proportions between the monetaryand nonmonetary incentive usually
fall into between 3:7 and 7:3. Therefore, this model adopts primarily some
proportions for our imitation such as 3:744:6 @4.5:5.56)5:5 @5.5:4.5@6:4 @7:3. The
results of imitation are as follows:
From the above analog output figure concerning the annual sales and annual profits,
and table 2, we can see that the portfolio incentive of the monetary and nonmonetary
incentive has different influence during the different stage of an enterprise's evolution,
the concrete analysis are as follows:
At the stage of expansion
At the stage of 2001-2005, A company has accumulated certain amount of
capital and technological capacity. Due to the fierce competition of market and
china’s entry into WTO, the process of economic globalization has speeded up, which
force A company to expand its scale greatly. By analyzing the feasibility of the table 2,
we can conclude that as for the portfolio incentive of the monetaryand nonmonetary
incentive in this stage, the proportions falling into 44.5:5.5-6 are relative good. That
is, in this stage, enterprises should emphasize nonmonetary incentive more and the
effectiveness of nonmonetary incentive is better than the simple promotion of
monetary incentive. Because enterprises need to expand themselves in this stage, they
should pay more attention to build its intemal culture , present a good vision for their
employees, offer employees more chances to communicate@#leam and get be trained,
provide employees more opportunities to develop their careers@attain and improve
their technological ability, encourage employees to be involved in corporate
management and increase their host-sprits, improve their leading styles, build the
outstanding corporate culture.
At the stage of quick development
In the stage of 2006-2010, A company has developed quickly and has possessed
certain scale and relatively good performance. According to the above results of
imitation and table 2, as for the portfolio incentive in this stage, the proportion is
relative good when falling into 55.5:4.5-5. For example, at the proportion of 5.5:4.5,
A company’s sales reach 54.1 billion and its profits reach nearly 0.7 billion in 2010.
In this stage, enterprises should pay more attention to the monetary incentive because
enterprises’ success is related closely to its employees’ hard work. Through
strengthening the intensity of monetary incentive properly, employees’ human capitals
can be embodied. So they can share the success of their companies and at the same
time meet their feeling of achievement.
At the stage of mature
After the stages of the expansion and quick development, A company has
accumulated strong financial capacity, its popularity has been enlarged, the quality of
its products and service has been accepted in the market and its employees have got
generous monetary returns. Therefore, since employees’ monetary satisfactions have
been met, they will ask new requirement to the nonmonetary incentive.
Knowledge- workers consider their jobs not just as means for making a living, so they
want to get more nonmonetary satisfactions from their jobs. The nonmonetary
incentive is of high-level in this stage, because they emphasize the feeling of
individual achievement, the contribution to their team or organization, and the repay
for society.
The analog output figure above and table 2 show that the reasonable proportion
should fall into 4.5.5:5-5.5 in this stage. For example, at the proportion of 4.5:5.5, A
company’s sales reach 70.6 billion and its profits reach nearly 0.8 billion.
Monetary: nonmonetary@3@7
sale profit
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table 2@analysis about monetary and nonmonetary portfolio incentive
year 2001 2005 Feasibil-ity | 2006 2010 Feasi-bi | 2011 2015 Feasi-bi
lity lity
portfolio ratio
37 sale 84 150.4 | _ 172.3 314.5 | _ 348 477 _
profit 2.07 3.72 4.13 5.06 5.22 5.21
46 sale 84 199 + 239 441 _ 482 649 _
profit 207 4.62 4.74 6.01 6.40 4.90
45:5.5 | sale 84 273 HH 324 490 _ 552 706 HH
profit 2.07 4.94 4.98 5.72 6.98 7.91
55 sale 84 190 _ 260 524 + 547 650 +
profit 2.07 4.48 4.92 5.94 6.13 7.33
5.5:4.5 | sale 84 242 _ 337 541 + 558 692 _
profit 2.07 4.52 5.54 6.99 7.03 7.32
64 sale 84 164 _ 193 341 _ 378 482 _
profit 2.07 3.98 4.55 5.16 5.37 5.69
73 sale 84 160 _ 188 331 _ 366 464 _
profit 2.07 3.89 4.44 5.5 5.33 4.85
3.2 The different portfolio incentive mechanism during the different period of
employee's career development
In the front chapters, we have analyzed the dynamics of the incentive
combination. Knowledge-workers’ requirements for monetary and nonmonetary
incentives are variable with the different period of career velopment. In order to
analyze the effective incentive means for the knowledge-workers in the different
period of career development, we select three types of representative employees: fresh
employees(who has worked for less than two years)€@ general growth-employees and
key employees. Fresh employees who graduated from school shortly are in the period
of socialization; general growth-employees, who have gone through the stage of
socialization, are at the stage of learning and being trained continuously, so they are in
the growth period of their careers; key employees, who have gone through the
growth-stage and have become the key employees in their organizations, are in the
mature period of their career. The model analyze primarily how to adopt effectively
the portfolio incentive to these three types of employees who are at the different stage
of career development, and then reach the aim of the incentive mechanism. It is the
key employee's analog output figure of the portfolio incentive below:
Key employees are at the mature stage of their careers. From the analog output
figure and table 2, we can see that the reasonable proportion of portfolio incentive for
key employee fall into 4.5:5.5, followed by 4:6. As far as these employees concerned,
after having gotten certain monetary incentive, they pay more attention to individual
achievement, corporate culture and their involvements in corporate management; they
hope they can do more contribution for their companies and can be accepted by their
companies and colleagues. Considering the key employees of knowledge- workers,
enterprises should give them more trust and working freedom; only by this way, their
working enthusiasm can be motivated and their enterprises’ performance can be
improved.
As to the fresh employees who are in the period of their socialization, so they
wish to be accepted by their seniors and their colleagues, and try to adjust themselves
to the new circumstance. It is the beginning of their career. In this period, considering
the feasibility of the analog results of the portfolio incentive, the proportions are
relative good when falling into 4.5-5:5-5.5. As to the fresh employees’ preference
between the monetary and nonmonetary incentive, they incline slightly more to the
nonmonetary incentive, but their needs for the monetary incentive are still very
strong.
As for the general growth-employee, they have gone through the period of
socialization. According to the analog output table 5, the reasonable proportions of the
portfolio incentive should fall into 5-6:4-5. We also conclude that the general
growth-employees pay more attention to the monetary incentive. So enterprises
should stress monetary incentive for them and provide them stable working and living
environment, which can make them work comfortably.
Table 3@analysis about monetary and nonmonetary portfolio incentive for key employee
year OT O10 O15 OOO
portfolio ratio eo
Ry sale 83.99 05.5 319 Z
profit 07 5.34 48
46 sale 83.99 483 629 ++
profit 2.07 5.8 6.54
45:5.5 sale 83.99 360 29 +++
profit 0 5.90 45
55 sale 83.99 460 620 +
profit 07 3.0 6.0
5.5:4.5 sale 83.99 420 580 _
profit 07 Ly Te
64 sale 83.99 378 538 _
profit 07 3.27 472
3 sale 83.99 a 86 Z
profit 2.07 4.97 4.3
Table 4:analysis about monetary and nonmonetary portfolio incentive fornew employee
year 2001 2010 2015 OO®
portfolio ratio ee
37 sale 83.99 334 459 _
profit 2.07 5.10 46
46 sale 83.99 424 529 os
profit 2.07 49 5.64
45:5.5 sale 83.99 522 687 ++
profit 2.07 55. 6.65
55 sale 83.99 445 582 +
profit 07 5.D 3.8
545 sale 83.99 80 530 Z
profit 07 ERE a7
6f sale 83.99 of -
profit 2.07 5.07 4.62
3 sale 83.99 0 rs 7
profit 2.07 4.87 41
Table 5: analysis about monetary and nonmonetary portfolio incentive for genaral employee
year O01 O10 O15 OO
portfolio ratio eo
¥ sale 85.0 nN EG 7
profit 2.07 5.20 a7
46 sale 83.99 453 545 7
profit 07 198 3.74
7555 sale 83.99 77 379 7
profit 07 3. 6.15
35 sale 85.99 35 baz +
profit 2.07 35 651
Baad sale 83.9 380 OZ +F
profit 2.07 5.87 TAT
of sale 83.99 378 067 +
profit 2.07 3.47 6.62
73 sale 83.99 370 584 7
profit 2.07 4.87 a5
4 Conclusion
According to the analog results, during the different stage of
knowledge -workers’ career development, their demands are variable. So enterprises
should adopt the portfolio incentive mechanism which can meet the demands of
knowledge -workers. In the period of socialization, employees are sensitive to both the
monetary and nonmonetary incentive, but incline slightly more to the nonmonetary
incentive; in the period of growth, employees prefer the monetary incentive; however,
as to the employees in the mature period, after having gotten certain monetary
incentive, they begin to pursue the new nonmonetary incentive which usually is of
higher level, so they pursue the feeling of individual achievement; take part in the
corporate management and pursue individual contribution. Therefore, when designing
an incentive system, enterprises should pay attention to dynamics of incentive system
and consider the different stage of employees career development, and then adopt
different portfolio incentive means. Only by this way, perfect incentive effectiveness
and the aim to improve the enterprise's performance can be reached.
An enterprise's incentive system is a dynamic@complicated and nonlinear
system . This article uses the method of system dynamic to build a portfolio incentive
model of system dynamic. According to the different stage of employees’ career
development and companies’ evolution, we carry out system simulation based on the
dynamic of the portfolio incentive of monetary and nonmonetary incentive.
Enterprises should adopt different methods of portfolio incentive in the different
stage of their evolution. At the stage of expansion, the better proportions between the
monetary and nonmonetary incentive should fall into 45:5-6; at the stage of quick
development, it should fall into 55.5:4.55; and then at the stage of mature, it should
fall into 4.5-5:5-5.5. At the different stage of employees’ career development, the
portfolio incentive of monetaryand nonmonetary incentive is also dynamical In the
beginning of career (the period of socialization), the suitable proportion between the
monetary and nonmonetary incentive should fall into 4.5:5.5; 5-6:4-5; in the period of
growth, it should fall into 5-6:4-5; and the proportions falling into 4.5-5:5-5.5 are
relative good in the period of mature.
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