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Utilitarianism or romanticism: the effect of rewards on employees innovative behaviour

Yu Zhou
Department of Organization and Human Resources, School of Business, Renmin University of China, Beijing, China

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Yingying Zhang
CUNEF, Complutense University of Madrid, Madrid, Spain, and

Angeles Montoro-Sanchez
Departamento de Organizacion de Empresas, F. CC. Economicas y Empresariales, Complutense University of Madrid, Madrid, Spain
Abstract
Purpose The aim of this paper is to empirically explore the relationship between human resource rewards management and innovative behaviours, particularly between the utilitarianism and romanticism reward approaches and employee creativity in the workplace. Design/methodology/approach The paper adopts a quantitative approach. After analysing construct validity and reliability, the study empirically tests its hypotheses by performing a multi-regression analysis with a sample of 216 individuals. Findings The study reaches three main conclusions. First, tangible extrinsic rewards affect the innovative behaviour of employees in an inverse-U shape. Second, intrinsic motivations have a substantially positive impact on the innovative behaviour of employees. And third, extrinsic rewards and intrinsic motivations have positive interaction effects on individual creativity at the workplace. Originality/value The paper focuses on the theoretical battle between the utilitarianism and the romanticism perspective of human resource reward approaches toward employees creativity. Based on examination of the main effects of monetary incentives and intrinsic reward practices respectively, the study highlights a complementary view to explore a positive interaction between the two reward congurations, and to exploit a total reward system for facilitating individual innovative behaviours. Keywords Performance related pay, Entrepreneurialism, Innovation, China Paper type Research paper

1. Introduction Entrepreneurship refers to different forms of novelty in rms, such as innovation, strategic renewal and establishing new ventures, and as such it is crucial to
This study is supported by the National Natural Science Foundation of China (71002096), the Fundamental Research Funds for the Central Universities, Research Funds of Renmin University of China (10XNF019; 10XNK049), Project ECO2009-13818 of Spanish Ministry of Science and Innovation, Project BSCH-UCM (GR58/08) and Catedra Bancaja Jovenes Emprendedores of Complutense University of Madrid. The authors would like to thank reviewers for all comments and suggestions that have improved the paper. Any and all remaining errors are the authors, and do not necessarily represent the position of the institutions.

International Journal of Manpower Vol. 32 No. 1, 2011 pp. 81-98 q Emerald Group Publishing Limited 0143-7720 DOI 10.1108/01437721111121242

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organisational survival, growth and performance. In todays knowledge-based economy, innovation has become the principal source of competitive advantages in global business; the success of rms now depends more on their intelligence capability such as employee creativity than traditional material assets (Amabile et al., 1996). The creative capability of individual and collective knowledge workers is the fuel that powers innovation in rms. While creativity leads to the production of new and useful ideas in any domain, innovation is the successful implementation of those creative ideas within an organisation (McLean, 2005). Since Guilford (1950) rst put the spotlight on creativity, no agreed framework for its study has emerged (Mayer, 1998). Some scholars concentrate on divergent thinking (Torrance, 1974), while others focus on the cognitive perspective of the innovation process (Finke et al., 1992). Explaining creativity via personality and intrinsic motivations (Amabile, 1983) and viewing it through the lens of work performance (Scott, 1995) also have their proponents. Despite these different approaches, the main characteristics of creativity are clear: creativity is the capability and behaviour to propose or generate new (i.e. unique) and useful (i.e. satisfying some specic needs) work results (Sternberg and Lubart, 1998). In recent years, interest in researching the intersection between human resource management (HRM) and entrepreneurship has increased (Kaya, 2006). In fact, some studies highlight the role of HRM as an effective facilitator for innovation and as a dimension of entrepreneurship (Wang and Zang, 2005). This paper sets out to empirically explore the relationship between HRM and innovation, particularly between reward management and employee creativity in the workplace. Reward management is a key function in HRM systems in modern enterprises, playing an important role in attracting, retaining and motivating employees (Milkovich and Newman, 2004). Despite much theoretical argument, however, scholars have reached no consensus on whether reward management can improve innovation and creativity in the workplace. The main debate in the eld is termed as the battle between utilitarianism and romanticism. Utilitarianism emphasises extrinsic incentives such as monetary compensation to motivate the innovative behaviour of employees (Winston and Baker, 1985; Edwards, 1989). In contrast, romanticism views creativity as self-motivated psychological behaviour that is typically sparked by intrinsic spiritual rewards (Deci and Ryan, 1985; Amabile, 1997; Hennessey and Amabile, 1998). This paper attempts to test the impacts of both extrinsic rewards and intrinsic motivation as HRM practices to enhance employee creativity, as well as seeking possible interactions between the two. The empirical study examines Chinese enterprises because Chinas transitional economy provides a good opportunity to gauge the effectiveness of diverse managerial practices (Tsui et al., 2004). During the years of central economic planning in the Peoples Republic of China the reward system was based on bureaucracy, egalitarianism and spiritual incentive, but market-oriented reforms have now popularised economic rewards (Taylor, 2005). Despite much research into incentive-driven innovation in China, few empirical answers have emerged. A survey in 2005 by the China Enterprise Confederation and China Enterprise Directors Association (focussing on the top 500 Chinese rms) reveals the importance of reward management in enhancing employee creativity, as well as showing that the

inappropriate application of reward practices is largely responsible for impeding innovation in organisations. This research, then, makes three important contributions. First, we employ a novel analytical framework based on the conict between utilitarianism and romanticism to study the effects of the different reward approaches on the innovative behaviour of employees. Second, the paper empirically tests the relationships proposed in the context of Chinese rms. The evolution of social, cultural and economic conditions in China makes it an almost unique environment for comparing intrinsic and extrinsic reward systems. In other cultural contexts such as North America and Europe intrinsic motivators may currently be less likely to be applicable. And third, the results of our research aim to provide researchers and practitioners with empirically supported suggestions that will rene reward management in the rm. The paper is structured as follows: the next section postulates hypotheses based on a review of the literature. Section 3 describes the quantitative methodology used to test the hypotheses and section 4 presents our results. The nal section outlines our conclusions and the studys theoretical and practical implications, along with a research agenda. 2. Theories and hypotheses Human resources have been considered as an important strategic source to achieve and sustain competitive advantages (Wright and McMahan, 1992). Numerous empirical studies conrm the inuence of HRM on the rms bottom-line performance or on employees psychological and behaviour outcomes (e.g. Huselid, 1995; Combs et al., 2006). Meanwhile, in highly dynamic business environments innovation and creativity have become crucial for creating competitive advantages for the rm. People are the most vital resource of an innovative organisation, and all innovation-based rms have to learn how to manage, motivate and reward them in order to succeed (Gupta and Singhal, 1993). Consequently, some recent studies on rm innovation or employee creativity have focussed on both organisational behaviour and human resource management issues (Shalley et al., 2004). Indeed, Zhou and Hong (2008) see innovation as an outcome of particular HRM congurations. Little empirical evidence exists, however, on how HRM practices affect the innovation performance of the organisation and employees. Indeed, empirical studies of this area commenced only a few years ago (Dorenbosch et al., 2005; Laursen and Foss, 2003; Shipton et al., 2006; Beugelsdijk, 2008). In this paper, we add our empirical contribution to the eld, specically examining the role of reward management in boosting employees innovative behaviour. The following sections contain a detailed discussion of two different approaches to reward systems to motivate employee creativity. Based on this discussion, the paper then posits specic hypotheses to be tested. 2.1 Extrinsic rewards and creativity Benthams (1789) philosophy of utilitarianism underpins the extrinsic reward approach. Utilitarianism provides the foundation for early behaviourist arguments that suggest that peoples behaviours are driveable and changeable and that extrinsic rewards can bring expected behaviours and performance (e.g. Maltzman, 1960; Pryor et al., 1969). In support of this position, some empirical studies show that rewarding

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divergent thinking results in higher levels of creativity (Winston and Baker, 1985; Edwards, 1989). Some strictly experimental studies indicate that higher economic compensation correlates positively with increased innovative behaviour by employees (Eisenberger and Cameron, 1996; Eisenberger and Armeli, 1997). Extrinsic rewards and resource investment have been seen as necessary to motivate employee creativity, especially in formalised tasks (Amabile et al., 1986). Recent studies by Eisenberger et al. (1998, 1999a, b) reveal that performance-linked salary increases and monetary rewards positively inuence innovative behaviour and results. Long-term incentive plans (e.g. stock options), team-based rewards (e.g. prot-sharing plans), and security benets are also empirically shown to have a positive effect on employee creativity (Laursen and Foss, 2003). Despite the theoretical and empirical evidence indicating the positive inuence of substantial economic rewards on the creativity of individuals, disagreement exists over the effectiveness of this approach. Some classical researchers criticise extrinsic rewards because they undermine intrinsic motivations. Lepper et al. (1973) and Lepper and Greence (1978), for instance, stress that excessive monetary rewards may eliminate or deviate peoples intrinsic motivations and thus destroy their creativity. Similarly, extrinsic compensations may reduce the autonomy and self-motivation of individuals, diverting their attention to economic benets and weakening their proactive innovative behaviour (Deci and Ryan, 1985; Amabile et al., 1996; Cooper et al., 1999). This negative effect is especially evident in ambiguously dened and explorative tasks (Amabile et al., 1986; Amabile, 1997). Extrinsic rewards, then, may be necessary to stimulate employee creativity or innovative behaviour. But overly generous economic compensations may divert or reduce the intrinsic motivation of employees and hence damage innovation. This leads us to postulate the following hypothesis: H1. Extrinsic rewards (including salary increases, performance-linked bonuses, team-based incentive plans, long-term incentive plans and security benets) have an inverse-U effect on the innovative behaviour of employees. 2.2 Intrinsic motivations and creativity In contrast to utilitarianism, romanticism emphasises intrinsic motivations as effective instruments to improve creativity and innovative performance (Deci and Ryan, 1985; Amabile, 1997; Hennessey and Amabile, 1998). This approach sees HRM practices (including reward management) that facilitate employee self-motivation as being benecial for innovative behaviour (Ryan and Deci, 2000). Based on this belief in the power of intrinsic motivations, many non-monetary rewards and development-oriented human resource treatments have been tested for their effectiveness at enhancing creativity. Examples from recent studies include: . actively building encouragement and recognising innovative organisational atmosphere (Amabile, 1997; Baer and Frese, 2003; Martins and Terblanche, 2003); . enriching job responsibility and empowerment (Oldham and Cummings, 1996; Amabile, 1997; Tierney and Farmer, 2004); . setting modest challenges and innovative performance targets in tasks (Shalley, 1991, 1995);

implementing improvement and guidance-oriented performance communication and feedback (Zhou, 1998); providing training resources and comprehensive learning opportunities (Hennessey and Amabile, 1998; Shipton et al., 2006); planning career development with job rotation and multiple channels (Gupta and Singhal, 1993); and maintaining good interpersonal relationships among employees (Ruppel and Harrington, 2000).

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In general, intrinsic motivations are seen as promoting innovative behaviours more positively and robustly than economic compensation does. Therefore, we put forward the following hypothesis: H2. Intrinsic motivations (including setting innovation objectives, assessing and recognising innovation, performance improvement feedback, providing extensive learning opportunities, job rotation, work exibility, cafeteria benets, and maintaining harmonious interpersonal relationships) have a positive impact on the innovative behaviour of employees. 2.3 Interaction of extrinsic rewards and intrinsic motivations on creativity Scholars of HRM effectiveness theory argue that the synthesised bundle of HRM practices can inuence work performance better than any individual HRM practice (MacDufe, 1995). Bundling extrinsic and intrinsic reward systems, then, may be a more effective way to improve innovative behaviour. Moreover, Zhou and Hong (2008) argue that even higher performance can be achieved when the bundling is complementary instead of a simple horizontal t. The contrasting perspectives of utilitarianism and romanticism lie behind different opinions on the effectiveness of intrinsic and extrinsic reward systems for employee innovation. Nevertheless, these two viewpoints are not mutually exclusive. The recent focus on a total rewards framework combines both intrinsic motivations and extrinsic rewards to achieve a balance in reward management. The total rewards model presented by the American Compensation Association in 2006 not only includes monetary rewards and security benets, but also emphasises intrinsic motivations such as performance recognition, work-life balance, and employee career development. Additionally, the newest work on reward systems by Kerr (2008) emphasises the optimal mix of multiple types of nancial, prestige and job content rewards for strengthening employee responsibilities and contributions. Some studies on employee creativity (Amabile, 1997b) reveal that the use of both intrinsic motivations and extrinsic rewards is benecial for the entrepreneurial performance of top management teams in small and medium-sized enterprises (SMEs), as well as for the performance of technical workers in technology-intensive rms (e.g. Lee et al., 1999; Rumpel and Medcof, 2006). Based on this, then, an interaction effect between intrinsic and extrinsic reward approaches is likely to affect employee creativity positively. This leads us to posit the following hypothesis: H3. Extrinsic reward and intrinsic motivation have positive interaction effects on the innovative behaviour of employees.

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In summary, the emphasis of utilitarianism on extrinsic rewards and the focus of romanticism on intrinsic motivation have both gained a measure of theoretical support. This paper proposes that there is an inverse-U relationship between extrinsic rewards and innovative behaviours, and an interaction effect between intrinsic motivations and extrinsic rewards. We believe that this relationship may be theoretically signicant for the development of research in this eld. Moreover, the majority of empirical conclusions reached so far have been drawn from laboratory environments. Under these experimental conditions, sufcient practical reward management items cannot be introduced. In general, a lack of empirical data from the workplace exists. Therefore, this study intends to test the above hypotheses in an organisational setting, employing variables of intrinsic motivations and extrinsic rewards. 3. Methods 3.1 Data collection Since most theories are generated and empirically tested in a western context, we attempt to add value to our empirical study by collecting data in China. This is not only because of the emerging economic inuence of Chinese business, but also because Chinas huge population (one fth of the worlds population) may make the results more generalisable. Our empirical data were obtained through random sampling and survey questionnaires sent to employees in Chinese enterprises. The data collection was performed in two phases. In the rst phase, a preliminary survey test was carried out on a small scale in the Beijing area. A total of 60 questionnaires were distributed among several rms, with a return rate of 93 per cent. The objective at this stage was to test the questionnaires design, wording and clarity. The feedback from this phase was used to revise and improve the questionnaire. In the second phase, the redesigned questionnaire was distributed in the Beijing, Shanghai, Guangzhou, JiangSu, and Zhejiang areas to employees working in 18 organisations in the telecommunications industry. The data were collected via different communication channels: face-to-face, e-mail and traditional mail. In total, 300 questionnaires were distributed and 248 returned, of which 216 were valid, thus making an available return rate of 72 per cent. The characteristics of the valid samples are distributed in the following manner: 51.4 per cent male and 48.6 per cent female, with means of 45 per cent aged between 21 and 30, 36.2 per cent aged between 31 and 40, and 18.8 per cent aged between 41 and 50. The educational level of the respondents is generally high: 63.8 per cent possess an undergraduate degree and 27.1 per cent a Masters degree. The years of service of the respondents are: 11.5 per cent between two and ve years, 42.7 per cent between one and three years, and 38.5 per cent less than one year. And their work functions are: 33 per cent work in technical departments, 25.3 per cent in administrative (including personnel and nancial) departments, 25.2 per cent in production and other operational departments, and 16.5 per cent in customer service and marketing departments. This sample squares well with the idea that young people are the driving force behind innovation in enterprises, and that a high educational level of qualied human resources are necessary for innovation. While most research into innovation only considers technical departments, our study adopts a technological and managerial perspective to study the innovative behaviour of employees.

3.2 Measures The paper denes the following variables for measurement. Independent variables. The independent variables of this study are the extrinsic rewards and intrinsic motivations used in reward management practices. As outlined in the studies already mentioned (Eisenberger and Armeli, 1997; Laursen and Foss, 2003; among others), extrinsic rewards include ve items: base-salary increases, performance-related bonuses, incentive plans for teamwork, stock options and other long-term reward plans, and security benets. Intrinsic motivations include nine items: enriching job denition, setting innovation objectives, assessing innovation results, recognising innovation behaviours, tutoring performance improvements, providing learning resources, job rotation, self-optional benets, and maintaining interpersonal harmony (see Hennessey and Amabile, 1998; Ryan and Deci, 2000; among others). Respondents evaluate the adoption level of these reward practices on Likert-style questionnaires: where 1 represents the lowest level of adoption, and 5 represents the highest level. Conrmatory factor analysis (CFA) was employed to test the construct validity of these measures. Introducing the two scales (of ve items and nine items respectively) into the measurement model with LISREL 8.7 produced the following series of t indexes: 0.087 RMSEA, 0.056 SRMR, 0.95 NNFI, and 0.96 CFI and IFI. Hu and Bentler (1999) establish SRMR and RMSEA as the two main indexes of adjusted goodness of t, with values between 0.05 and 0.08 indicating a good level of t and values oscillating between 0.08 and 0.10 representing an acceptable level of t. A value of . 0.9 for comparative t indexes such as NNFI, CFI and IFI is regarded as a relatively good level of t. Based on this, the two models used in this paper appear to have relatively high goodnesses of t. Cronbachs a was used to test the reliability of the ve items of extrinsic rewards and the nine items of intrinsic rewards. Respective values of 0.571 and 0.784 indicate acceptably reliable results, according to Nunally (1994), a value of Cronbachs a between 0.5 and 0.7 represents an acceptable level of measure reliability, and . 0.7 is regarded as relatively high reliability. The average scores of the two scales are respectively used as the values of the extrinsic rewards and intrinsic motivations approach. Dependent variables. Creativity, specically the innovative behaviour of employees is the dependent variable of this study. Recently more and more empirical research on organisational behaviour has used the innovative behaviour of employees in the workplace as a measure of creativity (Oldham and Cummings, 1996; Amabile, 1997). Inline with this approach, this study adopts the 13 measures of employees innovative behaviour developed by Zhou and George (2001, p. 696); these include measuring items of the type I can usually propose new solutions to the questions and I can provide suitable proposals and plans to implement new ideas. Respondents to the questionnaire indicate their level of agreement on a scale of 1 to 5 (1 low, 5 high). Because this 13-item instrument has been validly tested as a one-dimension construct scale (Zhou and George, 2001), its average value is the nal measure result for the variable of innovative behaviour. Cronbachs a shows a strong reliability of 0.864. Control variable. Previous studies have often used demographic data as control variables (e.g. Zhou and George, 2001). This study follows suit by asking for data such

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as sex (dummy variables 0 female, 1 male), age, educational level (1 up to middle-school education, 2 high-school diploma, 3 bachelors degree, 4 Masters degree, and 5 PhD). As other work-related factors may also affect innovative behaviour, the questionnaire includes variables such as years of service, work department (dummy variables containing two job categories: technical job 0, non-technical job 1), and position level (1 new entry, 2 junior, 3 mid-level director/expert, 4 senior manager/expert, 5 top manager/expert). The statistical analysis programme of SPSS (15.0) was used to process the data. Descriptive statistics, correlation analysis (with Pearson correlation coefcients) and the OLS hierarchical regression approach (Aiken and West, 1991) were all used to test the papers hypotheses. In addition, to test the hypotheses on inverse-U impacts and interaction effects, both the independent and dependent variables were centralised to avoid possible problems of multicollinearity in the relevant regressions (see Vinod and Ulhan, 1981). 4. Results Table I displays the statistical results of the means, standard deviations, and Pearson correlation coefcient matrix. The control variables for years of service and position level both correlate positively with innovative behaviour, with position level showing a slightly higher correlation. Sex, educational level and work department do not show any signicant correlation with the dependent variable. The main independent variables of intrinsic motivations and extrinsic rewards correlate positively with innovative behaviour (signicant at the 0.01 level), and thus provide an empirical base for exploring their causality further. Table II contains the results of the multi-regression analysis. Model 1 reveals a positive and signicant regressive relationship ( p , 0.05) between the control variables of position level and innovative behaviour; no other signicant relationship is observed. Age, sex, educational level, and work department have no signicant linear effect on the innovative behaviour of employees. This nding shows that creativity is not demographically discriminated, but that it is more dependent on kinds of privileged capability. Models 2 and 3 test H1 regarding the inverse-U relationship between an extrinsic reward approach and innovative behaviour. Model 2 uncovers a positive relationship between extrinsic rewards and innovative behaviour (b 0:03, p , 0.001; DR 2 0:09, P , 0.001). This result conrms the positive inuence of extrinsic rewards on innovative behaviour and provides support for the basic premise of utilitarianism (see Eisenberger and Cameron, 1996). Inputting the quadratic term of the extrinsic reward approach in model 3 produces improved signicance with respect to model 2 (DR 2 0:03; p , 0.05). The regression coefcient of the quadratic term is negative (b 20:12, p , 0.05). This result indicates a quadratic relationship between extrinsic rewards and innovative behaviour with a negative effect. Combining the results of models 1 and 2 produces an inverse-U shape (see Figure 1). H1, then, is signicantly conrmed: The extrinsic reward approach has positive effects on innovative behaviour, but excessive extrinsic incentives will deviate or erode the intrinsic motivation of employees towards creativity and will reduce their innovative behaviours (Cooper et al., 1999). We call this phenomenon the over-erosion effect.

Variable 0.48 1.10 2.13 1.95 2.23 0.69 2.63 2.86 3.56 20.09 20.06 20.10 20.12 * 0.23 * * 0.06 0.02 20.11 0.10 0.59 * * 0.17 * * 2 0.05 2 0.02 0.03 0.08 0.03 0.06 2 0.10 2 0.04 0.04 0.00 0.19 * * 2 0.01 2 0.09 2 0.09 0.13 * 0.02 0.16 * * 0.13 * 0.19 * * 0.50 0.31 0.65 0.95 1.40 1.40 0.85 0.81 0.53

Mean

SD

1 2 3 4 5 6 7 8 9

Sex Age Educational level Years of service Position level Work department Extrinsic rewards Intrinsic motivations Creativity

2 0.02 0.08 0.07

0.71 * * 0.30 * *

0.45 * *

Notes: Sample size: n 216; *signicant at the 0.05 level (one-tailed test); * *signicant at the 0.01 level (one-tailed test)

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Table I. Means, standard deviations, and correlation coefcient matrix

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Variable 2 0.20 2 0.08 2 0.01 0.13 0.11 * 0.21 20.25 20.11 0.02 0.17 * 0.07 0.22 0.30 * * * 20.28 20.16 0.02 0.16 0.07 0.18 0.25 * * * 20.12 * 0.17 * 5.37 0.03 *

Sex Age Educational level Years of service Position level Work department Extrinsic rewards Extrinsic rewards2 Intrinsic motivations Extrinsic rewards intrinsic motivations R2 F DR 2 a 0.06 * 2.19 0.15 * * * 5.06 0.09 * * *

Notes: Sample size: n 216; *signicant at the 0.05 level; * *signicant at the 0.01 level; * * *signicant at the 0.001 level; aDR 2 from model 1 to model 3 means the R 2 change of the latter model in relation to the former model. DR 2 of model 4 means the R 2 change of this model in relation to model 1; DR 2 of model 5 means the R 2 change of this model in relation to model 2. DR 2 under the model 6 means the R 2 change of this model in relation to model 5

Table II. Results of regressions Model 1 Model 2 Innovative behaviour Model 3 Model 4 20.22 20.23 20.03 0.21 * * 0.06 0.15 0.46 * * * 0.26 * * * 10.36 0.20 * * * Model 5 2 0.21 2 0.24 2 0.04 0.21 * 0.06 0.14 2 0.05 0.49 * * * 0.26 * * * 9.06 0.11 * * * Model 6 2 0.22 2 0.28 2 0.03 0.21 * 0.07 0.11 2 0.05 0.45 * * * 2 0.09 * 0.27 * 8.49 0.01 *

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Figure 1. Relations between intrinsic/extrinsic rewards and employee creativity

Model 4 tests H2. Inputting the independent variable of the intrinsic motivations approach produces more signicant results than model 1 does (b 0.46, p , 0.001; DR 2 0:20, P , 0.001). This result conrms the positive relationship between intrinsic motivations and employees innovative behaviour and provides support for the premise underpinning romanticism (Amabile, 1997; Hennessey and Amabile, 1998). Models 5 and 6 test H3 regarding the interaction effects between intrinsic motivations and extrinsic rewards. In the same way that model 2 analyses the extrinsic reward approach, model 5 shows that the intrinsic motivations approach appears to be signicant at the 0.001 level. The interaction term of both independent variables are then inserted into model 6 to test their interactive effect. The results of model 6 demonstrate a signicant improvement over those of model 5 (DR 2 0:01; p , 0.05). The regression coefcient of the interaction item is 2 0.09 ( p , 0.05). Thus, intrinsic motivations and extrinsic rewards exert a signicant interaction effect on the innovative behaviours of employees. To shed more light on the attributive type of this interaction effect, this study introduces values of ^ a standardised deviation into model 6 and plots the results. We take extrinsic rewards as the moderator to analyse the relationship between intrinsic motivations and innovative behaviour. As Figure 2 shows, regardless of whether extrinsic rewards are at a high or low level, the effects of intrinsic motivations on employees innovative behaviour are positive (as both the continuous line and dotted line rise). This result demonstrates that intrinsic motivations have a more stable and positive inuence on individual creativity. Specically, when intrinsic motivations play the main role with extrinsic rewards as the moderator, the interaction effect appears to be reinforced. When the level of extrinsic rewards is high, the positive effect of intrinsic motivations appears to be stronger (represented by the continuous line rising more steeply than the dotted line in Figure 2). This reveals that the intrinsic and extrinsic rewarding bundles positively complement each other to inuence employees innovative behaviour. This supports our H3. Additionally, when intrinsic motivations

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Figure 2. Interaction effect of extrinsic and intrinsic rewards on employee creativity

play the main role, extrinsic rewards have a reinforced moderating impact. In this way, we place particular emphasis on intrinsic motivation practices that can reduce the over-erosion effect of extrinsic rewards. 5. Conclusions and implications Properly managed human resources can be a source of sustained competitive advantage to organisations (Barney and Wright, 1998). This is particularly true for rms operating in complex and dynamic competitive environments, where the capability to rapidly acquire and assimilate new market and technological capabilities is the key to creating enduring advantages over competitors. In this line, many studies demonstrate that entrepreneurial behaviour through innovation and human resources are closely linked to competitive advantage (Wang and Zang, 2005). This paper empirically explores the relationship between human resource management (HRM) and innovation, particularly between the utilitarianism and romanticism reward approaches and employee creativity in the workplace. The three hypotheses put forward in the paper are all supported by the empirical data from the workplace and lead to the following conclusions. First, tangible extrinsic rewards are necessary to encourage the innovative behaviour of employees. Excessive extrinsic rewards, however, may depress this behaviour by eroding self-motivation. Second, a series of intrinsic rewards emphasising clear innovation orientation, exible empowerment, recognition, learning support and the comprehensive development of human capital have substantially robust effect on promoting innovative behaviour. Third, extrinsic rewards and intrinsic motivations exert signicant interaction effects on innovative behaviour. When the main effect of the intrinsic motivation approach is xed, the extrinsic reward approach can exploit a positive moderation to reinforce the positive impact of intrinsic motivations on employee creativity. This reinforced interaction effect can prevent the over-erosion effect produced by extrinsic rewards. In conclusion, the utilitarianism and romanticism approaches are not exclusive, but are inclusive and complementary. This study explores this area in more detail by running regressions of specic reward management items for employees innovative behaviour. Controlling for intrinsic motivations and control variables, the paper examines the ve items of the extrinsic reward approach (base-salary increases, performance bonuses, team incentives,

long-term incentives, and security benets). The results indicate that base-salary increases and long-term incentive plans such as stock options have the most signicant and positive effects on innovation. This nding makes it clear that short-term and unstable reward management practices are not always effective, and that more long-term and sustainable reward systems are necessary to promote innovation. In line with the ten-year rule proposed by Hayes (1989), the fruits of innovation often come after around ten years of hard work and accumulation. Models 4, 5 and 6 in Table II also show that work experience positively correlates with innovative behaviour, which conrms that a long-term management style has positive meaning for innovation. This research also explores the regressions of the nine items of the intrinsic motivation approach with innovative behaviour. The ndings here indicate that setting innovative objectives, recognising innovation, job empowerment and exibility, and maintaining interpersonal relationships have the most positive effects. These practices have achieved effective results in some well-known cases. 3M, for example, has a rm performance objective that at least 30 per cent of annual turnover should come from innovative products developed in the last four years. 3M also promotes the 15 per cent rule, which encourages and authorises technical employees to use 15 per cent of their work time to do research on their personal projects, regardless of whether these will directly benet the rm. These instruments have promoted the innovative behaviour of employees, and in turn the innovative performance of the rm. These results show the importance of the economic reforms that took place in China and their effects on innovation. Although scientists in ancient China contributed signicantly to technological innovation in human history (e.g. the four great inventions of the compass, gunpowder, paper and printing), the country did not evolve technologically during many centuries due to the lack of economic motivation (Needham, 1969). This continued to be the case in the Peoples Republic of China in the period immediately before the market-oriented economic reforms (Zeng, 2006). During the times of a centrally planned economy in China with low salaries, small salary increases, and limited bonuses intrinsic motivation practices such as spirit, honour and emotional motivations played important roles in innovation (Tung, 1981). Many signicant scientic advances were achieved under poor conditions and with limited extrinsic resources. Since the economic reforms in China, market forces chiey the rapid increase of monetary compensation have energised the innovation system. And innovation has been critical for sustaining rapid economic development during this transition of the Chinese economy. Understanding and exploiting the advantages of differential reward approaches, then, is critical for promoting innovative behaviour both at a national and an organisational level. Given the role of China in the world economy, we speculate that the results of this study may be applicable to other highly dynamic and competitive business environments in the global knowledge economy. Further research in other western or non-western countries is desirable for scholars to resolve this issue. Questions to be answered include: . How does culture inuence different innovative behaviours across nations? . Is the strong positive effect of intrinsic value only relevant to the Chinese cultural context and not to rms in the western world?

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Since most signicant contemporary innovations in the western world were produced by individuals who were intrinsically motivated (e.g. Edison with the light bulb, Ford with the automobile, Gates with Microsoft), it is reasonable to argue that intrinsic motivations are relevant not only in Chinese enterprises, but also in western rms. An effective exploitation and exploration between innovation-driven reward approaches and HRM practices may be of strategic importance for rms to perform better in a global context (March, 1991). This papers ndings and conclusions make important contributions to HRM and innovation behaviour literature and practice. Despite the inherent risks and uncertainty that working with cognitive measures brings, this studys results are robust, as are the reliability of its measures, along with its validity analyses and regression models. Future studies should extend this research to other elds and introduce different HRM modules (e.g. performance appraisal, recruiting and selection) to test their relationships with innovation. Attempting to build an integrative high-innovation human resource system compared with the constructs of high-performance, high-commitment work systems would also be useful (e.g. Huselid, 1995; Guthrie, 2001). Future work may also extend the analysis from an individual to an organisational or multilevel study. Based on the conrmatory factors analysis and measurement model employed in this paper, adopting structural equation models to test the optimal level of variables and formula would also be an area that merits attention. Future studies could also give the analysis increased predictive meaning by obtaining more substantial data on items such as real wage amounts and the weight of specic bonuses.
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Laursen, K. and Foss, N. (2003), New human resource management practices, complementarities and the impact on innovation performance, Cambridge Journal of Economics, Vol. 27 No. 2, pp. 243-63. Liao, H. and Chuang, A. (2004), A multilevel investigation of factors inuencing employee service performance and customer outcomes, Academy of Management Journal, Vol. 47, pp. 41-56. About the authors Yu Zhou is an Assistant Professor at the School of Business, Renmin University of China. His research interests include strategic HRM, HRM effectiveness within the Chinese context, HRM-innovation/creativity linkages, and HRM-leadership interaction. Yu Zhou is the corresponding author and can be contacted at: zhouyuhr@ruc.edu.cn Yingying Zhang is an Associate Assistant Professor of Management and Organization at CUNEF, Complutense University of Madrid. Her research interests include international strategic human resource management, innovation, cultural values, learning, leadership and Chinese management. Angeles Montoro-Sanchez is an Associate Professor of Management at the Complutense University of Madrid, Spain). Her research interests include strategic alliances, co-operative agreements, mergers and acquisitions, entrepreneurship and industrial clusters and science and technology parks.

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