How Performance Incentives Shape Individual Exploration and Exploitation: Evidence from Microdata

We integrate the literatures on exploration/exploitation and incentives, to examine how incentives impact individuals to explore new ideas or exploit existing ideas, as well as how this impact is dependent on the capabilities of individuals and peer-related performance comparisons. Further, we also investigate the implications of the change of incentives on exploration performance. We make use of micro-data on the commercial projects of sales employees at a South Korean e-commerce company to observe how a reduction in individual performance incentives shape the behavior of individuals to explore/exploit as well as their performance. We find that individuals engage in more exploration after a reduction in performance-based incentives, yet, interestingly, the increase in exploration is largely driven by highperforming individuals. Further, the increase in exploration recedes whenever individuals underperform their direct peers after the incentives reduction. Finally, exploration performance improves after the incentives change, and performance is particularly boosted for individuals who are working in complex task environments. Overall, this study contributes to the literature on exploration/exploitation by examining how individual behavior to explore or exploit is impacted by performance incentives and what are the moderating effects of this impact. We also contribute to the incentives literature by investigating the implications of incentives on innovation, and the heterogeneous effects of identical incentives on different individuals. Further, the study also provides insights into important micro-foundations of firm capabilities and performance.