Research Request: Incentives to Innovate in Local Government?


As part of your membership benefits, the Alliance staff provide research services for local government member submitted requests. Topics can range from pressing issues to emerging trends. This benefit is made possible through our partnership with Arizona State University Marvins Andrews Fellowship

Request Prompt:

“Does offering financial incentives to municipal government employees increase the quality and number of innovations brought to fruition? Are there examples that demonstrate the return on investment? I might be looking in the wrong places, but I have not been successful finding recent data on the public sector. Open to international perspectives as well! Here at the City, similar to AFI, we have an annual Innovation Recognition event every spring. Though the number of innovations have increased over the years, the caliber of innovations has remained the same; they are mostly incremental changes. It was suggested to me that if we offered a financial incentive that the impact/reach of the innovation could improve, and I am hoping that we can find a few studies that reject or affirm this.”

Background Research:

Performance Based Compensation: Overall, limited amount of current studies and academic surveys. Ultimately, would need to define what performance leads to innovation.

State governments currently looking to move in this direction need to be weary of “…collective bargaining agreements [which] often make it difficult to expend pay for performance to union employees.” Of note, it appears performance pay incentives could be used for in-demand jobs.

“At first blush, the superiority of pay-for-performance scheme seems obvious.  Why would any organisation not choose a system that provides direct extrinsic incentives for effort?  However, it has two potential drawbacks.  First, it is expensive in terms of monitoring costs, particularly for a large range of jobs in the public sector that lack well-defined goals.  Second, increasing extrinsic incentives may “crowd out” intrinsic motivation to exert effort (Frey and Oberholzer-Gee, 1997).  In the public sector, public service motivation has been found to be an important source of motivation for workers (Perry and Wise, 1990; Ashraf, Bandiera, and Jack, 2012), and managers are (rightly) concerned that performance-pay may undercut public service motivation yielding sub-optimal outcomes.”

 The article details the effects of some program at varying levels of government. The evidence is inconclusive whether there is much effect, especially considering the message sent to all other staff. Also, “performance pay is a simple idea—financial rewards linked to employee performance are supposed to motivate employees to achieve desired results. It’s the donkey and carrot argument. But research suggests it’s not that simple.”

The larger central point comes down to “[u]nderstanding the state of manager/employee relationships will be central to planning and managing a system governing merit salary increases.”

Organization for Economic Co-operation and Development report The Innovation Imperative in the Public Sector;

As cited in Chapter 1: “Empowering the public sector workforce to achieve public sector innovation” They discuss the motivation for employees to pursue innovation in the workplace. “Enabling innovation in public sector organizations means enabling the people who work in these institutions. People management helps to build innovative capacity in a great many ways, by ensuring that the right people with the right skills and talents are working in the right ways to maximize creative energy and see projects through to implementation. Motivating public servants to think and act in ways that lead to innovation requires a careful consideration of the reward structures in public sector organizations and the organizational climate and culture. How risk is handled and the way that experimentation and learning are encouraged can impact the willingness of employees to contribute their ideas and energy to innovation. Effective leadership that is able to inspire and ensure stable and effective working conditions can also contribute.”

This report goes on to elaborate that when there is more distinct reward in the form of what your employees desire as motivation they will feel more secure taking the risks associated with innovation and pursue the leaps towards these ideas.

World Development Report 2014: Risk and Opportunity: Managing Risk for Development:

Regarding the funding of innovation, overall there are different stages involved in business that could perhaps be modeled in municipalities. For instance; “increase innovation by addressing constraints in access to finance. The government can address the market failure of funding innovation by creating a business environment that includes appropriate resource support so that the private sector is able to provide financing at the three stages crucial for innovative enterprises. The early stage, when entrepreneurs need to develop ideas into viable concepts and product; the startup stage, when entrepreneurs need seed funding to establish enterprises and the growth stage, when entrepreneurs need venture capital to expand.”

Unleashing Breakthrough Innovation in Government: Public sector innovators are improving government by replicating the market conditions that have long fostered breakthrough innovation in the private sector.

Harvard Business School, supported by contributions from research groups at Harvard Kennedy School, various municipalities, and the Office of Science and Technology Policy of the White House conducted the following research:

“As we studied instances of successful and unsuccessful innovation in government, we identified scenarios in which leaders were able to drive out costs through the implementation of novel technologies and service models that got the job done better for constituents. As the causal theories suggested, the difference between success and failure was the ability to create or preserve most if not all these five conditions for breakthrough innovation:

  • Ability to experiment
  • Ability to sunset outdated infrastructure
  • Existence of feedback loops
  • Existence of incentives for product or service improvement
  • Existence of budget constraints for end users

*We found that the ability to innovate is derived from the first two conditions—the ability to experiment and the ability to sunset outdated infrastructure.”

Specific Examples:

Chicago created a "modern-day suggestion box" by developing a $20 million loan fund to support promising innovations. Ideas can be just about anything so long as they pay for themselves, improve services, and don't lead to the hiring of more staff.  The following is the application guidelines for projects to be considered for the funding. This is a great example of internal innovation that encourages employees to feel like their voices are being heard by management and giving them responsibility to innovate and improve their departments and programs.

The Public Impact

By 2014 Chicago had launched a new Small Businesses Centre, restructured Neighbourhood Business Development Centres and appointed the city’s first Small Business Officer, alongside the micro-lending program. $1.4million in micro-loans had been given to 160 small businesses, 80% of which were minority owned and 56% owned by women. These loans helped create 700 new jobs. “The savings and revenues achieved through selected projects will be used to repay the loan capital, and savings above the loan amount will be reallocated to the Department to invest in further innovation.”

In the first budget cycle, a dozen ideas were given serious consideration and four received funding, principally IT projects. These comprised:

  • A centralized system for making web payments to the city.
  • A US$900,000 loan to the Departments of Public Health, Consumer Protection and Business Affairs to support a new effort to reduce the black market sale of cigarettes.
  • A system which “creates an online Google map of all current private benefit signs and uses [such as valet parking or taxicab stand signs], and then links the signs to the private entity that should be paying for it”. [3]
  • An automated system for scheduling building inspections.

More information and Case Study of Program:

  • Marin County, CA

Innovation Fund

Rather than establishing an innovation office or appointing a CIO, government employees participated in a leadership development program composed of people at all levels of county government, hailing from several different departments. A grants program funded initiatives proposed by employees and included both public-facing projects and internal programs to improve efficiency. But more important than these specific projects are the way that the task force encourages relationship-building across county government, beginning a larger process of institutional change than the structure of most innovation offices allows. Below is the full report from 2013 of their innovation programs.

More information

Innovation Awards:


Contact: Dan Eilerman, Assistant County Administrator,

  • Denver, CO

Peak Academy

An example of creating a growth opportunity for staff that will foster innovation across departments is from Denver, CO. Mayor Michael Hancock in 2011 developed Peak Academy which provides classes to city employees to improve skills and teach new systems, fosters collaboration across agencies, and develops new innovations of its own. Ideas that have already come out of Academy will save the city $10 million annually. Perhaps not a direct financial incentive but a leadership development incentive, can spur creativity.

More information &

*Also, the Alliance for Innovation’s Corporate Partner ReVision ( features the work of Scotty Martin, who lead the creation of Denver’s Peak Academy. Please let us know if you would like his contact information.

  • City of Los Angeles, CA
  • The Innovation Fund

The City Council, acting on the recommendation of the Mayor, created the fund in the Fiscal Year 2014-15 City budget. The program has since funded lots of great programs which can be found There is also a great FAQ of how this employee focused program works to get their ideas funded to improve the city they work for.// Funds are given to the department, which the employee whose idea it was is located in. The current size of the Innovation Fund is $1 million; however there is no requirement that we spend that entire amount during the first year of the program.  Only quality projects that score highly on our criteria will be funded.

Socially motivated incentives:

  • Adams County, CO – TLG 2017 case study: “Not Your Daddy’s Workforce Training Program: Rethinking Organizational Training & Development”

“What most organizations and employees want (and need) is a constant dynamic of exploring, learning, evolving and growing. While required training is a necessary thing, it’s not the only thing. We set out to kick aside the neat rows of metal chairs and the wooden desks, tossed out the stunningly boring lectures and overhauled our organization’s training environment. We asked ourselves what if we empowered our employees to share their knowledge, have fun, and make a difference? What if we shared that same model with our libraries, our schools and our other neighboring jurisdictions? Come with us and learn how you can begin to overhaul your traditional workforce training program.”

More information

  • City of Durham, NC – “IdeaStarter 2018”

Billed as suggestion box 2.0, IdeaStarter is a growing effort and program in Durham, NC, giving the needed tools and support to grow selected staff ideas.

More information


Contact: Caley Patten Management Analyst, Office of Performance and Innovation


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