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

Should Firms Consider Employee Input in Reward SystemDesign? The Effect of Participation on Market Orientation andNew Product PerformanceYinghong (Susan) Wei, Gary L. Frankwick, and Binh H. Nguyen

Will increasing employee participation in reward decisions increase new product performance by first increasing afirm’s level of market orientation? Literature offers limited insight to the effects of listening to employees regardingreward system design and whether this may influence market orientation implementation and new product perfor-mance. This paper provides research to fill the gap by examining the relationship between participation-based rewardsystems, market orientation, and new product performance. Based on expectancy theory, a conceptual model wasdeveloped 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-depthinterviews were conducted with managers from 11 different firms to verify the proposed model. Then a multi-industrysample of managers from 290 firms was surveyed to maximize generalizability of the results. Data were analyzed usingstructural equation modeling techniques to simultaneously fit the measurement and structural models. The findingsshow that market orientation significantly impacts objective new product performance and mediates the relationshipbetween participation-based rewards and objective new product performance. Participation-based rewards positivelyaffect market orientation but surprisingly affect new product performance negatively, while positively moderating therelationship between market orientation and new product performance. The results suggest that managers shouldinclude employee input in designing reward systems. However, managers should also be careful of how much input theyallow employees in determining their rewards and goals as more input will improve market orientation or respondingto information collected by, and disseminated throughout the firm, and that, in turn, will improve some types of newproduct performance. However, the direct effect of employee input can decrease new product performance suggestingthat there may be a trade-off between various success measures of new products developed and introduced by the firm.

Arthur D. Levinson, chairman and chief executive ofGenentech Inc., once said: “If you want an innovativeenvironment, hire innovative people, listen to them tellyou what they want, and do it.” (McGregor, 2007)

S hould firms listen to employee desires to deter-mine rewards if they want to create environ-ments for successful new product performance?

Improving new product performance involves many man-agement controlled variables. Previous research suggeststhat one of those variables, market orientation, may influ-ence performance (Kohli and Jaworski, 1990; Narver andSlater, 1990; Ruekert, 1992), and specifically newproduct performance (Slater and Narver, 1994), and thatreward system design influences market orientation(Jaworski and Kohli, 1993).

Researchers examining reward systems found thatproper systems may facilitate some outcomes (Marsden,2004) including market orientated behaviors and cross-functional coordination in new product development(Sarin and Mahajan, 2001). More specifically, rewardsystem design and reward decisions can affect businessperformance because they “can have a positive influenceon . . . alignment of [employee] interests” (Gerhart, 2000,p. 160). Previous work has called for more research tounderstand how various reward structures complementboth market orientation and new product innovation (Weiand Atuahene-Gima, 2009). Although CEOs like ArthurLevinson consider listening to employees to be importantfor innovation, and despite knowing that reward systemdesign affects market orientation and performance, extantliterature has not determined if listening to employeesregarding reward system design will improve market ori-entation and new product performance. Thus, stimulatingemployee motivation remains an important and challeng-ing issue in an effort to increase market orientation and

Address correspondence to: Gary L. Frankwick, College of Business,University of Texas at El Paso, Texas 79968. E-mail: [email protected]. Tel: 915-747-6051.

J PROD INNOV MANAG 2012;29(4):546–558© 2012 Product Development & Management AssociationDOI: 10.1111/j.1540-5885.2012.00924.x

new product innovation. This study answers the call ofprevious research by developing and testing a model thatexamines the specific relationships between rewardsystem design, market orientation, and new productperformance.

Theory and Hypotheses

Market Orientation and New Product Performance

Market orientation is defined as the degree to which anorganization collects intelligence about its customers andmarket environment, disseminates it across functions,and collectively responds to market information to satisfycustomer needs (Kohli and Jaworski, 1990). Literaturedocuments many studies showing the direct positiveeffect of market orientation on new product performance.Early research in the field showed a positive relationshipbetween market orientation and general new productsuccess (Slater and Narver, 1994). This was followed bystudies showing positive relationships between market

orientation and innovation (Atuahene-Gima, 1996), salesgrowth (Narver, Jacobson, and Slater, 1999), marketshare (Pelham, 2000), and again, general new productsuccess (Wei and Morgan, 2004). Other studies foundstrong positive effects of market orientation on incremen-tal new product performance and to a lesser extent onradical new product performance (Atuahene-Gima,1995). More recently, the meta-analysis by Kirca, Jay-achandran, and Bearden (2005) presents many studiesthat found positive relationships between market orienta-tion and new product performance. Examining thesestudies offers insight to the aspects of market orientationthat influence new product performance.

Market-oriented firms exhibit superior market infor-mation gathering and processing abilities (Kohli andJaworski, 1990), which allows them to quickly and accu-rately learn about marketplace changes, and positivelyaffect the new product development process (Cooper,1994), facilitating the launch of timely new products tothe market (e.g., Day, 1994; Li and Calantone, 1998;Slater and Narver, 1994).

Market orientation also provides great esprit de corpsand employee commitment (Jaworski and Kohli, 1993).Thus, market-oriented firms exhibit a strong teamapproach to new product development, and strong cross-functional teams can reduce time to market improving newproduct success (Cooper, 1994). Indeed, employee atti-tudes account for significant variance in organizationalperformance (Adsit, London, Crom, and Jones, 1996).

In addition, market-oriented firms encourage employ-ees to take risks when creating new offerings in responseto changing market needs (e.g., Jaworski and Kohli,1993; Kohli and Jaworski, 1990). Since new productsuccess depends on constant stimulation and innovativeideas, new product development requires risk taking (e.g.,Sethi, Smith, and Park, 2001). As a result of the informa-tion collection and processing abilities, strong team cul-tures, and risk-taking willingness, market-oriented firmstend to develop better new products than less market-oriented firms, suggesting hypothesis 1 below, anddepicted graphically in Figure 1.

H1: Firm market orientation is positively related to newproduct performance.

Participation-Based Rewards and NewProduct Performance

Participation-based rewards refer to systems that consultemployees during the reward design process, takeemployee input for various reward decisions, and

BIOGRAPHICAL SKETCHES

Dr. Yinghong (Susan) Wei is Assistant Professor of Marketing at Okla-homa State University. She earned her PhD at the University of NorthCarolina at Chapel Hill. Her current research interests focus on theinterface between marketing strategy and strategic management includ-ing market orientation, innovation management, new product develop-ment, corporate entrepreneurship, business-to-business marketing, andlearning theory. Her research has been published in journals and con-ference proceedings such as the International Journal of Research inMarketing, Industrial Marketing Management, and the Journal ofProduct and Innovation Management. Her dissertation research won aKauffman Dissertation Fellowship and a Doctoral Dissertation Awardfrom the Institute for the Study of Business Markets (ISBM) at Penn-sylvania State University.

Dr. Gary L. Frankwick is Associate Professor of Marketing in the SpearsSchool of Business at Oklahoma State University. He earned his PhDfrom Arizona State University, his MBA from the University ofWisconsin-Oshkosh, and his BA from the University of Wisconsin-Madison. His research interests include management decision-makingprocesses and cultures in new product development and marketingstrategy across functional units within firms and across firms in bothhorizontal and vertical alliances. He has previously published researchin the Journal of Marketing, Journal of Business Research, Journal ofPersonal Selling & Sales Management, and Industrial MarketingManagement.

Binh H. Nguyen is a PhD candidate of marketing in the Spears Schoolof Business at Oklahoma State University. He received his Bachelorin Industrial Management from Ho Chi Minh City University ofTechnology (Vietnam), and his MBA in International Business is fromthe Asian Institute of Technology (Thailand). His research interestsinclude B2B relationships, organizational learning, and new productdevelopment.

EMPLOYEE INPUT IN DESIGNING REWARD SYSTEMS J PROD INNOV MANAG 5472012;29(4):546–558

concerns employees’ feelings and preferences for variousreward forms.

Much research has focused on an employee’s incen-tive to perform various tasks or to achieve various goalsin an organization. Expectancy theory, as proposed byVroom (1964) and expanded by many researchers (e.g.,Hackman and Porter, 1968; Heneman and Schwab, 1972;Mitchell, 1973; and Porter and Lawler, 1968), suggeststhat employee motivation depends on their expectationsof benefits from effort expended to achieve certain levelsof performance. Expectancy theory explains the interac-tion of an employee’s expectations that certain outcomeswill be obtained from efforts to complete certain actstimes the attractiveness of expected outcomes (Hackmanand Porter, 1968).

Following the early work employing expectancytheory in employee reward situations, researchers foundthat when employees participate in reward system design,they exhibit greater motivation, particularly if they workin R&D units (Kauhanen and Piekkola, 2006; Lawler,2000), and that motivation level relates directly with thelevel of job performance in sales management (Walker,Churchill, and Ford, 1977). From an expectancy theoryperspective, the degree of employee participation inreward system design relates positively to reward accep-tance and work commitment because employees helpdetermine what rewards they might receive for accom-plishing goals they help set, especially for knowledge-based employees (Lawler, 2000).

Reward system design might involve the ability todetermine the ratio of salary to bonuses or the timing ofbonus evaluation periods. Involving employees in thedesign of reward systems allows them input to determinewhat rewards they will receive, provides clear informa-tion about how much effort they should give to achievetheir desired performance, and how much of a givenperformance they should have to obtain their desired out-comes (Leavitt and Mueller, 1967). Being able to selectdesired outcomes and having both clear information ofthe actions required and probabilities of obtaining desired

outcomes should increase the likelihood of achieving theoutcomes. Hypothesis 2 presents this in testable terms.

H2: Employee participation in reward system design ispositively related to new product performance.

Participation-Based Rewards andMarket Orientation

From an expectancy perspective, individual acts or objec-tives relate to performance desired by firms, while out-comes relate to extrinsic rewards desired by employees.However, Mitchell (1973) added intrinsic rewards to theexpectancy equation and found that employees who wereallowed to participate in decisions showed greater incen-tive to achieve goals because of the “ego involvement”(Vroom, 1964, p. 229) of the employee deriving fromgreater group communication, cohesiveness, and socialinfluence. The intrinsic elements of group cohesivenessand social influence derived from participation in rewardsystem design affects the culture of the organiza-tion. According to Martin, Martin, and Grbac (1998),“employee involvement in marketing activities is perva-sive in the market orientation concept and is critical to thesuccessful implementation of a market oriented organi-zational culture” (p. 486). The level of market orientationis influenced by interdepartmental conflict and connect-edness (Jaworski and Kohli, 1993). However, interdepart-mental conflict and connectedness relate to employeeinvolvement, such as the level of communication,the level of sharing common values, the willingness tosolve conflicts, and the willingness to take responsibilityfor the work done (Lancaster and Velden, 2004). Sinceparticipation in determining rewards is one more elementof sharing responsibility, and since it should help clarifythe need for cooperation and coordination as suggestedby expectancy theory, it should affect a firm’s marketorientation. This argument suggests hypothesis 3:

H3: Employee influence in reward system design ispositively related to market orientation in the firm.

Market Orientation:• Information Generation• Information Sharing• Information Responsiveness

Market Orientation:• Information Generation• Information Sharing• Information Responsiveness

Firms’New Product Performance

Firms’New Product Performance

Participation Based RewardParticipation-Based Reward

Figure 1. Conceptual Model of Market Orientation, Participation-Based Reward, and New Product Performance

548 J PROD INNOV MANAG Y. S. WEI ET AL.2012;29(4):546–558

Participation-Based Rewards: Market Orientationand New Product Performance

Previous research suggests that reward systems are ante-cedent to market orientation (Kohli and Jaworski, 1990;Ruekert, 1992) and that new product development(NPD) success is an outcome of market orientation (e.g.,Atuahene-Gima, 1996; Wei and Morgan, 2004; etc.),which implies that reward systems may indirectlyenhance new product performance through their impacton market orientation. Logic in the first three hypo-theses argues that participation-based rewards directlyaffect both market orientation and new product perfor-mance, and market orientation directly affects newproduct performance. This line of reasoning suggeststhat participation-based rewards indirectly impact newproduct performance through market orientation,because after participation-based rewards lead to higherlevels of market orientation, the improved marketorientation activities will facilitate better new productperformance. Expectancy theory also suggests thatmore clear linkages between behaviors and outcomeswill strengthen the expectations that those outcomes willoccur. The information brought to employees throughmarket orientation helps clarify the links between per-formance and rewards. Specifically, market orientationclarifies the relationship between the reward system andnew product performance through full or partial media-tion suggesting hypothesis 4.

H4: Market orientation mediates the relationshipbetween participation-based rewards and new productperformance.

Moderation Effects

Employee incentives may be one of the critical factorsrequired to achieve new product success. As Atuahene-Gima (1996) notes, “although market orientation appearsto have a strong impact on the market success of aninnovation . . . it takes more than market orientation toensure the success of innovations in competitive environ-ments” (p. 99). Indeed, Atuahene-Gima (1996) found that“market orientation makes little or no contribution tomarket success beyond the contributions of the innova-tion characteristics examined [in the study]” (p. 99). Con-sistent with Atuahene-Gima’s (1996) results, Appiah-Adu and Ranchhod (1998) found that market orientationis not related to new product performance in the bio-techindustry. Lukas and Ferrell (2000) found that each of thevarious components of market orientation contributeeither positively or negatively to various types of innova-

tion. Similarly, Langerak, Hultink, and Robben (2004)found no direct effect of market orientation on newproduct performance, rather the effect was fully mediatedby product advantage and launch tactics. Narver, Slater,and MacLachlan (2004) also found that the traditionalmeasure of market orientation had no effect on newproduct performance. The mixed results from existingresearch on the market orientation–new product perfor-mance relationship suggest the likelihood that specificsituations or management methods might moderate therelationship.

In the management literature, empirical evidence sug-gests the moderating role of reward systems in thestrategy–performance relationship (e.g., Allen andKilmann, 2001; Rajagopalan, 1997). Specifically, Raja-gopalan (1997) found that different incentive methods(cash versus stock options) and different time horizons(short term versus long term) related to better perfor-mance in different product-market strategy situations,and that an incorrect compensation–strategy pairing canhave a nonsignificant or even negative effect on perfor-mance. All of this suggests that if management givesemployees a voice in determining their compensationplans, the strategy–performance relationship should beenhanced. Expectancy theory supports this perspectivebased on research by Vroom (1964), showing that differ-ent extrinsic outcomes will be valued differently, and thushaving the option to choose outcomes should increase theincentive to perform to obtain selected outcomes. Subse-quently, Mitchell’s (1973) research shows additionalintrinsic value of participation in enhancing team-basedoutcomes through group norms and individual commit-ment. Thus, considering market orientation as an organi-zational cultural, new product performance should beenhanced as a result of both intrinsic and extrinsic incen-tives to generate and share market information whenemployees can personally match their rewards to the situ-ation by having a say in their compensation plan design.This logic suggests hypothesis 5.

H5: The positive relationship between market orienta-tion and new product performance is stronger whenparticipation-based reward systems are employed thanwhen nonparticipation-based reward systems areemployed.

Research Method

Emphasis on new product development and adoption ofmarket-oriented policies make China an ideal context forthis study (e.g., Atuahene-Gima, 2005; Wei and Morgan,2004). Reward systems in such an environment become


critical for firms to sustain innovation performance andsurvive in China’s transitional economy. To test thehypotheses, a mixed-method approach was adopted tocollect data. Before the major survey, 19 in-depthinterviews were conducted with managers from 11 com-panies to identify and confirm the factors believed tobe important in new product success (e.g., Kohli andJaworski, 1990).

Following the interviews, an “administered on-site”survey was conducted to test the hypothesized model. Asample, provided by government sources and commer-cial directories, included 290 firms located in threecities. All selected firms were engaged in the develop-ment and sale of new products where individuals orgroups with responsibility for NPD could be identified.A multi-industry sample was selected to ensure repre-sentation of a wide variety of markets and to maximizegeneralizability. The seven industries selected for theresearch consisted of computer hardware, pharmaceuti-cals, optical equipment, consumer electronics, textiles,toys, and food processing. A senior-level manager ateach firm was initially contacted by telephone to elicitparticipation and to identify the most knowledgeableinformant. Of the 290 firms, 127 firms agreed to partici-pate. The positions of the key informants identifiedinclude: general managers; factory managers; marketingmanagers; R&D managers; and engineering managers.Validity of the informants’ responses was checked byasking the years of experience with their firms and thefamiliarity to their positions (1–9 scale with 1 = “verylimited knowledge,” 9 = “very substantial knowledge”).The means of 7.10 for job tenure and 7.42 for job fami-liarity suggest that key informants possess the requiredknowledge and experience about the issues under study,which suggests greater confidence in the quality ofinformants and accuracy of the data.

An administered on-site method to collect data wasused to overcome the difficulties of low response rate andhigh costs of survey research in China (e.g., Li andAtuahene-Gima, 2002). In all, 110 useable surveys werereceived representing a 44% response rate. The mean sizeof responding firms was 654 employees and ranged from20 to 25,000 employees. Responding firms had been inoperation for an average of more than 11 years. Using theextrapolation approach recommended by Armstrong andOverton (1977), differences between early and laterespondents were checked based on respondents’ charac-teristics such as age, experience, education, and the firms’characteristics such as firms’ age, the number of employ-ees, the type of ownership, and the annual sales of thefirms. Both analyses showed no significant differences at

the 05 level, suggesting that nonresponse bias is unlikelyto be present in the sample. In addition, objective newproduct performance data were collected to avoid thepresence of potential common method bias.

Measures and Validation

The survey instrument was developed on the basis ofexisting research. A pretest with 17 managers was con-ducted before the final survey to validate measurementinstruments in terms of face validity, clarity, and appro-priateness of measures to the Chinese context. Simplevalidity (such as factor analysis) and reliability (Cron-bach’s coefficient alpha) of the measurement scales wereempirically checked (such as whether the items of eachconstruct hang together) before conducting the majorsurvey. The measures and their sources are reported inTable 1. The strategic business unit (SBU) level is theunit of analysis. Independent measures were collectedusing a five-point Likert scale, where informants wereasked to rate the items from 1 = strongly disagree to5 = strongly agree.

New product performance (a = .94) was measuredobjectively with scales modified from Griffin and Page(1993): percentage of profits provided by new productsless than three years old, percentage of market shareprovided by new products less than three years old, andpercentage of sale growth from new products less thanthree years old.

Market orientation (a = .80) was assessed with thescale developed by Jaworski and Kohli (1993), whichmeasures market orientation as (1) market informationgeneration, (2) sharing, and (3) responsiveness. Sampleitems are as follows: “We poll end users frequently toassess the quality of our products and services,” “Dataon customer satisfaction are disseminated at all levelson a regular basis,” and “If a major competitor were tolaunch an intensive campaign targeted at our customers,we would implement a response immediately.” A high-order construct is used for market orientation not only tobe parsimonious but also to overcome potential multi-colinearity among the three subdimensions (Bagozzi,1994). The high-order construct model (with threesubdimensions, c2

(d.f.=25) = 49.92) was compared withthe low-order construct model (with one dimensioneach, c2

(d.f.=27) = 73.10), and the results support the useof a high-order construct.

Following prior research, a participation-based rewardsystem (a = .90) was conceptualized on a continuumwith three items adapted from Balkin and Gomez-Mejia (1990) and Diaz and Gomez-Mejia (1997): “pay


decisions in this organization are made on a democraticbasis,” “Many employees have an input into pay deci-sions,” and “Employees generally feel that they have a lotof influence on how pay is determined in this organiza-tion.” Participation in pay decisions makes sense sincethe outcomes desired by employees typically involvesalary and bonuses as generalizable outcomes that areeasily convertible to other outcomes.

Several confounding variables were controlled includ-ing the economies of scale of NPD department size andfirm age (e.g., Wei and Morgan, 2004). Firm age wasmeasured by using the number of years the firm hasbeen in operation. NPD department size was measuredby using the number of employees in that department.To ensure normal distribution, firm age and the depart-ment size were included in analyses after a logarithmic

Table 1. Measurement Model and Confirmatory Factor Analysis

Constructs and Items Total Correlation Standardized Coefficient t-value

Fit: c2(127) = 175.22; IFI = .94; CFI = .94; TLI = .93; RMSEA = .056; Bollen-Stine bootstrap p value = .36

Objective new product performance (Cronbach’s alpha = .88)P1: Percentage of profit new product introduced in the last

three years.78 .86 10.54

P2: Percentage of market share provided by new products lessthan three years

.77 .84 scaling

P3: Percentage of sale growth from new product less than threeyears old

.76 .83 10.19

High-order: market orientation (Cronbach’s alpha = .80)Information Generation (IG) .74 scaling

G1: We are slow to detect changes in our customers’ productpreferences (R)

.48 .69 4.56

G2: We poll end users frequently to assess the quality of ourproducts and services

.41 .45 scaling

G3: We are slow to detect fundamental shifts in our industry(e.g., competition technology, regulation) (R)

.40 .60 4.63

Information sharing (IS) .82 4.50S1: When something important happens to a major customer

or market, the whole business unit knows about it in ashort period

.45 .57 5.37

S2: Data on customer satisfaction are disseminated at alllevels on a regular basis

.45 .65 scaling

S3: When one department finds out something importantabout competitors, it is slow to alert other departments (R)

.65 .78 5.81

Information Responsiveness (IR) 1.00 5.80R1: Periodically review product development efforts to

ensure that they are in line with what customers want.57 .69 7.01

R2: If a major competitor were to launch an intensivecampaign targeted at our customers, we would implementa response immediately

.62 .74 scaling

R3: The activities of the different departments in thisbusiness unit are well coordinated

.39 .47 5.37

Reward systemParticipation versus non-participation (Cronbach’s alpha = .90)

C4: Pay decisions in this organization are made on ademocrat basis

.81 .87 10.72

C5: Many employees have an input into pay decisions .84 .93 11.11C6: Employees generally feel that they have a lot of

influence on how pay is determined in this organization.75 .80 scaling

Control variableMarket potential (Cronbach’s alpha = .75)

B1: There is high growth in demand in this industry .51 .59 5.34B2: This industry offers many attractive opportunities for

future growth.65 .86 scaling

B3: Growth opportunities in this industry are abundant .57 .69 5.82

CFI, comparative fit index; IFI, incremental fit index; RMSEA, root mean square error of approximation; TLI, Tucker-Lewis index.


transformation. Market potential (a = .75) was measuredwith three items modified from Jaworski and Kohli(1993). The items assess growth in demand and opportu-nities in the industry.

A single confirmatory factor analysis grouping allmeasures was run with Bollen-Stine bootstrap estimationmethod with 1000 samples. The fit indexes reported inTable 1 indicate that the model fits the data well(c2

(127) = 175.22, incremental fit index [IFI] = .94; com-parative fit index [CFI] = .94; Tucker-Lewis index[TLI] = .93; root mean square error of approximation[RMSEA] = .056). Bollen and Stine’s (1992) recommen-dation was followed to evaluate robustness of the resultsregardless of sample size. The Bollen-Stine Bootstrapp-value of .36 indicates the model fits the data well. Nocorrelations among measurement items and measurementerrors were allowed. All the t-values for the factor load-ings of constructs are highly significant ranging from .45to 1.00, and there was no evidence of cross-loadings,indicating convergent validity.

Table 2 presents the correlation matrix and descriptivestatistics for the measures. Construct coefficient alphasrange from .75 to .90. Composite reliabilities were alsocalculated for each scale using the procedures outlined byFornell and Larcker (1981). Composite reliabilities forthe four scales range from .76 to .89. Table 1 presentsitem-to-total correlations. Examination of the patterns ofitem–item correlations and item–total correlation furtherindicate no deviations from internal consistency and

external consistency criteria suggested by Anderson andGerbing (1988). Thus, all constructs possess unidimen-sionality, high reliability, and internal consistency.

Discriminant validity was assessed using two differentmethods. First, the average variance extracted (AVE) foreach construct was assessed using the procedures out-lined by Fornell and Larcker (1981), and verified that theAVE was higher than the corresponding shared variancefor all possible pairs of constructs (Anderson andGerbing, 1988). Second, discriminant validity was testedusing two-factor CFA models involving each possiblepair of constructs, with the correlation between the twoconstructs first freely estimated and then constrained toone. In all cases the c2 value of the unconstrained modelwas significantly lower than the constrained model. Allchi-square differences were highly significant, whichsuggests convergent and discrminant validity among allof the study’s constructs (Bagozzi, Yi, and Phillips,1991). Overall, the constructs exhibit good measurementproperties.

Analysis and Results

The hypothesized relationships were tested in a singlestructural equation modeling (SEM) model. To testmediation effects, the recommendations from Shrout andBolger (2002) and Cheung and Lau (2008) were fol-lowed because they argue that the SEM with the boot-strapping approach produces unbiased statisticalevidence for the nonnormal distribution of mediationeffects even when sample size is small or medium. Abootstrap estimation procedure employing 95% confi-dence intervals with 1000 samples was used. The SEMtests mediation effects by providing standardized coeffi-cients and a significance test of the total effect, directeffect (unmediated effect), and indirect effects (mediatedeffect) (Kline, 2005).

To test moderation with SEM, the interaction termswere built by following the procedure that Ping (1995)suggests. First, all indicators, X1-Xn and Z1-Zm, weremean-centered for each pair of constructs X and Z.Second, a single indicator that presents the latent productXZ as (X1 + X2 + . . . Xn)(Z1 + Z2 + . . . Zm) was com-puted. Third, a model including all focal and controlconstructs as well as interaction terms was specified.The hypothesized model fit the data well, as indicatedby fit indices of c2

(173) = 234.08, IFI = .93; CFI = .93;TLI = .91; RMSEA = .05 (see Table 3). The Bollen andStine (1992) p-value of .43 indicates that parameterestimates in the hypothesized path model of SEM areunaffected by the sample size.

Table 2. Correlation Matrix and Descriptive Statisticsof Measures

Construct 1 2 3 4 5 6

1. Objective newproduct performance

.71 .11 .03 .03 — —

2. Market orientation .19* .74 .22 .07 — —3. Participation-based

pay-.14 .41** .75 .02 — —

4. Market potential .15 .19* .11 .52 — —5. Firm age (Log) -.09 -.17 -.11 -.22* — —6. Department size

(Log).16 .05 .04 .12 .38** —

Mean 44.84 3.73 2.36 3.48 2.08 2.78STD 23.18 .65 1.02 .82 .87 1.37Cronbach’s alpha .88 .80 .90 .75 — —Composite reliability .88 .89 .89 .76 — —

*Correlation is significant at the .05 level (2 tailed).**Correlation is significant at the .01 level (2 tailed).Notes: The average variance extracted (AVEs) are shown on the diagonal.The upper right-hand triangle elements are the shared variance. The lowerleft-hand triangle elements are correlations among the composite measures(unweighted mean of the items for each construct). We used 5-point scalesfor all items except objective new product performance, firm age, and NPdepartment size.


Main effects: Market orientation–performance. Thecoefficient in the SEM indicates that market orientationhas a significant, positive, and direct impact on newproduct performance (.27, t = 1.96). H1 is supported.

Direct effects of participation-based reward on newproduct performance. The coefficient of participation-based reward system on new product performance is -.37(t = -3.07). Thus, participation-based rewards (H2) havea significant but negative effect on new product perfor-mance. H2 is not supported.

Direct effects of participation-based rewards onmarket orientation. The coefficient of the participation-based reward system is .48 (t = 3.05). Hence, H3 is sup-ported: the participation-based reward system hassignificant positive effects on market orientation.

Indirect effects of participation-based rewards tomarket orientation to performance. Results of the SEMindicate that there is significant total effect, direct effect,and indirect effect from the participation-based rewardsystem to new product performance (total effect -.24,p < .05; direct effect -.37, p < .05; indirect effect .13,p < .10). The significant direct effect and total effectsuggest that market orientation partially mediates therelationship between participation-based reward systemand new product performance. In other words,participation-based reward system has a direct influenceon new product performance, but at the same time, it alsoindirectly affects new product performance through its

impact on market orientation. Thus, market orientationhas a suppression effect, which means that market orien-tation suppresses the negative relationship between theparticipation-based reward system and new product per-formance. A suppressor variable refers to a variablewhich changes the predictive validity of another variable(or set of variables) by its inclusion in a regression equa-tion, where predictive validity is assessed by the magni-tude of the regression coefficient. When a suppressionvariable is included, the magnitude of the relationshipbetween an independent variable and a dependent vari-able becomes larger (MacKinnon, Krull, and Lockwood,2000). Within a mediation model, the opposite signs ofdirect and indirect effects partially cancel each other out,but the total effect between participation-based rewardsystem and new product performance is still significant.Thus, market orientation does mediate the effect ofthe participation-based reward system on new productperformance. H4 is supported.

Moderating effects of participation-based rewardsin the market orientation–new product performancelink. The coefficient for the interaction is b = .18,t = 1.88 indicating that participation-based rewards mod-erates the relationship between market orientation andnew product performance. H5 is marginally supported.Figure 2 presents the interaction to increase understand-ing of the relationship and to facilitate interpretation ofthe results. The graph shows that the strength of the linkof market orientation–new product performance changesunder different reward systems. The relationship between

Table 3. Structural Equation Modeling Results

Standardized Coefficient t-value

Fit: c2(173) = 234.08; IFI = .93; CFI = .93; TLI = .91; RMSEA = .05; Bollen-Stine bootstrap p value = .43

Main effect:Participation-based reward → Market orientation .48 3.05**MO → Objective NP performance .27 1.96*Participation-based reward → Objective NP performance -.37 -3.07**Interaction effect:MO X participation-based reward → Objective NP performance .18 1.88#Control:Market potential → Objective NP performance .08 .74Firm age (Log) → Objective NP performance -.17 -1.63Department size (Log) → Objective NP performance .25 2.42*Two tailed significance test for mediation effects from 1000 boostraping sample with 95 percentile confidence intervals

Total Direct Indirect

Participation-based reward -.24* (p < .05) -.37** (p < .01) .13# (p < .1)

#p < .10; *p < .05; **p < .01; ***p < .001.CFI, comparative fit index; IFI, incremental fit index; RMSEA, root mean square error of approximation; TLI, Tucker-Lewis index.


market orientation and new product performance is stron-ger when the level of participation-based rewards is high.Figure 2 also indicates that high market orientation leadsto high new product performance no matter the level ofparticipation-based rewards. However, for low marketoriented firms, a low participation-based reward systemwill lead to better new product performance than a highparticipation-based reward system. The discussionsection further addresses this unexpected result.

Control effects. The coefficients of the three controlvariables (market potential, firm age [log], and depart-ment size [log] ) are .08 (t = .74), -.17 (t = -1.63), and.25 (t = 1.42). Thus, department size has significant posi-tive effect on new product performance.

Discussion

The study results show that market orientation signifi-cantly and positively affects new product performance,which adds support to previous literature (e.g., Atuahene-Gima, 1995; Im and Workman, 2004; Wei and Morgan,2004). This result implies that market orientation as amarket information-processing system is valuable to newproduct success by providing firms better understandingof their customers and competitors.

Although a participation-based reward system posi-tively affects market orientation, it also significantlyreduces new product performance. Though unexpected, itmight be that participation-based reward systems makeemployees more satisfied with the rewards they receive,resulting in happier but less productive employees. Forexample, in a 1990 study, Tornow and Wiley (1990)

found that employee satisfaction with pay and benefitswas negatively related to organizational performance. Itis also possible that all relevant outcome variables werenot measured for the study. While reward system partici-pation improves market orientation, and market orienta-tion improves new product financial performance, it ispossible that reward system participation negativelyaffects financial performance while positively affectingnew product creativity, or number of new products intro-duced, which were not measured, and which in turnnegatively affects financial performance. For example, inthe early studies on creativity, researchers found thatrewarding creativity after a creative task resulted ingreater creativity on the next task (Funderbunk, 1977;Glover and Gary, 1976; Goetz, 1989; Maltzman, 1960;Pryor, Haag, and O’Reilly, 1969). However, Reiss andSushinsky (1975, 1976) found that rewarding a lowdegree of creativity reduces more radical creativity. Thisfinding is consistent with the contention that market ori-entation may increase incremental innovation but reduceradical innovation, making it more likely that companieswill get more base hits but less likely that they will gethome runs with their new product development.

Another potential explanation for the unexpectedresults might rest in the types of activities required forsuccessful market orientation versus successful newproduct development. The key success of market orienta-tion depends on how much employees throughout theorganization get involved in the process of market infor-mation gathering, sharing, and responsiveness (Jaworskiand Kohli, 1993), while new product success may be moredependent on employee creativity in development, design,and marketing processes (Im and Workman, 2004).

Interaction between MO and Participation-Based Rewards on New Product Performance

Low Hi

Market Orientation

New

Pro

du

ct

Per

form

ance Low Participation

High Participation

Figure 2. Graphical Presentation of the Interaction between Market Orientation and Participation-Based Rewards


From expectancy theory, it is possible that employeesare focusing on quantity performance criteria such assales or market share of existing products rather than newproducts because the probability of achieving thoseobjectives is higher. Social psychologists claim that thepowerful effects of rewards on conventional performancesimply do not apply to creativity (e.g., Eisenberger andArmeli, 1997; Eisenberger, Armeli, and Pretz, 1998).Shaw, Gupta, and Delery (2001) found that individualincentives were negatively related to performance in aproduction setting where teamwork was critical to goodperformance. Individuals who receive rewards may workharder and produce more, but their activity is of lowerquality with more errors and is less creative. Amabile,Hennessey, and Grossman (1986) also found that expli-citly contracting to do an activity to receive a reward willhave negative effects on creativity, because an extrinsicincentive is detrimental to it (Robinson and Stern, 1997).The presence of external rewards such as money canfoster quantity performance but undermine creative per-formance (Deci and Ryan, 2000; Robertson, 2005). Thus,participation-based reward systems may foster moremarket orientation information-processing activity butinhibit the creative type of activities needed for newproduct development. If this is the case, it is not surpris-ing that although participation-based reward systemspositively impact market orientation, they also negativelyimpact new product performance.

Market orientation does mediate the effect ofparticipation-based rewards on new product performance.Due to the positive indirect effect of participation-basedrewards through market orientation on new product per-formance, the total negative effect of the participation-based reward system on new product performance issuppressed relative to the direct effect. This suppressioneffect also suggests that participation-based rewardsystems may be associated with two opposing processesthat contribute to new product performance in differentways. One process involves increased market orientation,which positively predicts new product performance,while the other decreases other countervailing variables.After controlling for the effects of market orientation,lower levels of participation-based rewards result inhigher new product performance than in situations withhigher levels of participation-based rewards.

Results of the study also show weak support for themoderating effect of participation-based reward systems.Although high market-oriented firms will benefit fromsuperior new product performance no matter the level ofparticipation-based reward systems, it is economicallywise for low market-oriented firms to employ low

participation-based reward systems rather than highparticipation-based reward systems to ensure better newproduct performance. This finding suggests that theparticipation-based reward system may shift employees’focus, decreasing some variables, and represent cost tofirms. Another explanation might be that in a high-participation condition, employees may focus too muchon the customer satisfaction side of market-orientationactivities and ignore the developmental side of market-orientation activities in NPD processes. While in low-participation conditions, employees may be able tobalance the amount of customer satisfaction and thedevelopmental part of market-orientation activities inNPD processes measured as profit, sales, and marketshare. Indeed, employing Narver and Slater’s (1990)model of market orientation, Lukas and Ferrell (2000)found that each dimension of market orientation affectednumber of new products introduced differently forme-too products versus new-to-the world products.

Theoretical Contributions andManagerial Implications

This research makes important contributions to bothinnovation theory and practice. Although some managershave addressed the importance of listening to employeesto foster innovative environments, little research hasinvestigated this issue. This research expands the know-ledge of the effects of listening to employees regardingreward decisions. The results indicate that participation-based rewards encourage market information-processingactivities but inhibit new product performance. Listeningto employees in reward decisions may benefit the firmwith quantity performance but not product developmentperformance.

Managers should listen to employees regarding theirdesired rewards when firms want to increase the level ofmarket orientation. But managers should be more cau-tious when listening to employees regarding rewardswhen they want to improve new product performance,since listening to employees regarding rewards can boostthe employees’ quantity performance of new products butmay not improve their creative performance. Managersneed to determine which is more crucial to the specificsuccess desired for new product innovation. According toEisenberger and Cameron (1998), people who are prom-ised a reward for nonspecific performance may fail toperform creatively. Only an explicit requirement of novelperformance in the reward system enhances creativity.Thus, it is important for CEOs and managers like ArthurLevinson to know that the reward systems designed for


new product professionals should be contingent on spe-cifically desired performances. Otherwise, the rewardsystem will not lead to increases in the specific perfor-mance the company wants to achieve. In addition, man-agers should consider the indirect effects of employeeparticipation in reward system design on performancethrough market orientation in that greater market orien-tation suppresses the negative effects of participation onperformance. By focusing more attention on market ori-entation outcomes, managers may be able to limit thenegative direct effects of employee participation inreward system design enough to make the total net effectpositive.

Limitations and Directionsfor Further Research

While this study provides interesting and meaningfulresults to innovation research and practice, its severallimitations also offer fertile avenues for further research.First, this study was conducted in China. The extent towhich the results can be applied to firms in other coun-tries leaves the opportunity to replicate it in other culturalcontexts to draw more firm and clear conclusions. Forexample, labor in China, and in many developing econo-mies, has typically had very little say in determining theircompensation system designs; so any input might be con-sidered very positive and result in positive effects onsome outcome measures. However, in countries with tra-ditions of strong unions, input in determining compensa-tion system designs might be expected, thus, may resultin no effect on outcome measures.

Second, although the current research accessed firmsfrom several industries, the conclusions of this study maynot be applicable to all industries. In addition, the cross-sectional approach may not lead to effective conclusionson causality. Therefore, a longitudinal study could bemore desirable to better capture the dynamism of theconstructs and test causality.

Third, this study examines the effects of participation-based reward systems on new product performance butdoes not address other types of incentive methods such asnonmonetary rewards. Determining the additional vari-ance contributed by other types of incentive tools avail-able to managers might be a fruitful area of futureresearch.

Study results also indicate negative effects ofparticipation-based rewards on NPD and positive effectsof participation-based rewards on market orientation. Apost hoc examination helps explain this unexpectedresult. However, new product creativity was not measured

in the study; so this explanation is tenuous. Futureresearch should directly measure and examine newproduct creativity. It would be interesting to find outwhether the effect of participation-based rewards on newproduct creativity performance is negative and the effecton new product quantity performance is positive.

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Documents

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