Should Firms Consider Employee Input in Reward System Design? The Effect of Participation on Market Orientation and New Product Performance

Will increasing employee participation in reward decisions increase new product performance by first increasing a firm's level of market orientation? Literature offers limited insight to the effects of listening to employees regarding reward system design and whether this may influence market orientation implementation and new product performance. This paper provides research to fill the gap by examining the relationship between participation-based reward systems, market orientation, and new product performance. Based on expectancy theory, a conceptual model was developed suggesting that participation-based rewards will increase market orientation by considering employees' desires regarding performance rewards. To test the model, a mixed method was used to collect data. First, in-depth interviews were conducted with managers from 11 different firms to verify the proposed model. Then a multi-industry sample of managers from 290 firms was surveyed to maximize generalizability of the results. Data were analyzed using structural equation modeling techniques to simultaneously fit the measurement and structural models. The findings show that market orientation significantly impacts objective new product performance and mediates the relationship between participation-based rewards and objective new product performance. Participation-based rewards positively affect market orientation but surprisingly affect new product performance negatively, while positively moderating the relationship between market orientation and new product performance. The results suggest that managers should include employee input in designing reward systems. However, managers should also be careful of how much input they allow employees in determining their rewards and goals as more input will improve market orientation or responding to information collected by, and disseminated throughout the firm, and that, in turn, will improve some types of new product performance. However, the direct effect of employee input can decrease new product performance suggesting that there may be a trade-off between various success measures of new products developed and introduced by the firm.