Pay for performance has these days achieved the status of a management mantra. A generation of executives, motivated by performance-measurement systems linking their actions to results and, ultimately, to compensation, has embraced the creed and practice of making assets "sweat." To continue flourishing, however, companies need to innovate as well as to exploit their existing assets. Yet most find it very hard to motivate their people to develop new business ideas and, simultaneously, to manage current performance.

The natural reflex might be that people should receive higher pay for innovating effectively. But our research¹ suggests otherwise. Surprisingly, the secret of persuading people to focus simultaneously on developing new businesses and managing current operations may be to rely less on pay for performance. In fact, companies that achieve both objectives de-emphasize performance pay or use it in a more nuanced, less intense manner. Crucially, they combine it with an unusually inclusive culture. In these companies, employees feel that their interests and those of the business are much the same, so they naturally try to do what is best for its current and long-term welfare, just as they do for themselves in their personal lives. Pay for performance may still...