In some cases, nothing succeeds like failure
Gustave Manso , a Brazilian-born finance professor who joined the faculty at MIT's Sloan School of Management this fall, is researching a problem that's not always considered a priority in executive suites: how to reward failure.
Manso thinks it's nearly impossible for companies to develop breakthrough products, processes, or approaches without encouraging the kind of trial and error that inevitably generates failures as well as successes. For him, the challenge is to craft incentives that will make creative people comfortable with thinking big and taking risks.
"To induce employees to explore new ideas, you have to tolerate early failure and reward long-term success," he said.
The dynamics of motivating innovation was a subject of Manso's doctoral dissertation at Stanford University last spring before he arrived at the Massachusetts Institute of Technology. The topic is of keen interest to corporations, technology researchers, entrepreneurs, and venture capitalists scrambling to harness the latest disruptive technologies or business models. But relatively little attention has been paid to the role of failures and the accidental successes they sometimes lead to.
One story cited by Manso serves as an archetype for the serendipity that occurs at those businesses, still in the minority, that celebrate experimentation: Spencer Silver , a researcher at the St. Paul technology company 3M, discovered a new kind of light adhesive in 1968 that initially was shelved because it couldn't compete with more robust glues and had no obvious commercial application. A decade later, his colleague Art Fry recognized that the adhesive, which stuck lightly to surfaces and was readily repositioned, would be perfect for the best-selling product 3M eventually launched as the Post-it Note.
3M isn't the only company forgiving of failures. Thomas J. Watson Sr. , the legendary manager who drove the growth of International Business Machines from the 1920s to the 1950s, once said, "The fastest way to succeed is to double your failure rate." That spirit lives on at IBM Corp.'s Thomas J. Watson Research Center.
Such tales are rare because honoring failure simply isn't in the DNA of most results-oriented executives. At most companies, the penalty for failure is high. So theories go untested and roads untaken.
Many of the incentives proposed by Manso to remedy this restraint -- slow-vesting stock options, golden parachutes, debtor-friendly bankruptcy laws, and, in academia, tenure -- cut against the grain of the post-Enron age of accountability.
But if the goal is spurring innovation, and for Manso that is the paramount goal, innovators must be shielded from punishment for failure. "Incentive schemes that motivate exploration are fundamentally different from standard pay-for-performance incentive schemes used to motivate effort," Manso wrote in an abstract this fall. "The optimal compensation scheme that motivates exploration exhibits substantial tolerance (or even reward) for early failure."
By contrast, the pay-for-performance model ubiquitous in business today compels employees to exploit existing approaches and technologies instead of trying something new, Manso suggested. And he warned that proposed US laws that would empower creditors in bankruptcy proceedings could put a damper on the nation's serial entrepreneurs.
But incentives that keep unproductive executives in their desks and protect them against the consequences of failure aren't necessarily a recipe for innovation, said Boston high-tech consultant Patricia B. Seybold .
"I've certainly seen a lot of cases where people are sticking around a company because they're waiting for their stock options to vest and they're feeling frustrated," Seybold said. She said some companies, such as mutual funds giant Fidelity Investments, have more success setting up "innovation labs" specifically charged with churning out new product or service concepts within 90 days to six months.
Roger L. Kay , president of the Wayland research firm Endpoint Technologies Associates, said the trick is to balance the cost of failure between individuals and organizations. Companies that are good at this give employees the equivalent of "risk chits," Kay said, in essence allowing them a certain number of failures before they're dismissed.
"If the costs of taking risks are too high, people won't do it," Kay said. "You have to transfer some of the risk to the company."
Some companies with staying power, such as IBM or General Electric Co., embraced risk-taking and rewarded failures only when it became clear they needed to reinvent themselves to survive in a new technology or business era. In such cases, the company leaders shifted incentives and personally took ownership for radical new initiatives.
"It's easier not to be innovative when business is good," said Gary Grossman , president of IDIusa, a consulting and product design firm in Edgewater, N.J. "It's easier to change the color of a product or put two in a basket than it is to come up with something new."
Manso, who arrived in Boston from California last summer, said cultural factors can also affect attitudes toward failure. "In Silicon Valley, if you fail, you start again," he said. "There is no stigma."
Robert Weisman can be reached at weisman@globe.com. 
