It seems to me that encouraging innovation is extremely important for startups, but how do you reward it?
If one employee contributes 10 good ideas that never get across the line, and another contributes one idea that gets implemented, which employee is the best innovator?
If you reward the guy/gal with one great idea, you'll stifle the flood of creativity from the guy/gal who's already thought up 10 ideas.
Is money or stock the best reward? Or are there other rewards people are using to encourage innovation?
I think you should pay people a reasonable salary and forget about bonuses etc. This is especially true for technical people. People will create and innovate because they love doing so, not because of the financial reward. Bonus schemes have a habit of creating unintended consequences and distorting behaviour in unwelcome ways.
As you've noted, it's really, really hard to figure out who the 'best' innovators are. Here are some more subtleties: is it really the 'great idea' that counts? It's often the execution that counts more than the idea. So if you reward the thinkers, the doers will get upset. If you start rewarding ideas, then people will feel pressure to come up with as many ideas as possible. Is that what you really want? It's impossible to set up any compensation scheme that reflects the nuances.
You'll find that other rewards are more effective. Recognition among their peers and the ability to do stuff that matters are, for example, is a way more powerful motivator than money for geeks (and most of us).
As the guy with 10 ideas that never make it to the line, I would prefer
If a project gets to fruition, the idea is only a piece of the puzzle. It will take the efforts of the rest of the organization to bring it to fruition, so rewarding just the idea guy with a cash bonus or stock may de-motivate the rest of your team. I would consider an overall profit sharing scheme that slightly favors the idea generator.
Let me take you through the narrative in my head for how I am looking at this.
Let's say I believe there is a potential market for a something we in the office have but consider a toy (i.e. something useful but not "product" worthy). I talk to friends and family that might be interested, get their feedback, produce a memo that describes my idea, what I think its potential is and upcoming events or other opportunities to get more information and put it in front of the people who could be our potential clients. Now, assuming the rest of management is on board, we'll need sign off from sales who will have to push this, then there are the graphics/branding, and competitive issues to consider. So you can already see the team effort involved. As a developer I am often tapped to make someone's brilliant idea come to life.
Its been a long time since one of my ideas has appeared on a store shelf though so weighing this opinion is left as an exercise for the reader.
We reward innovation by filing patents and giving the inventor credit. I echo the other posts about bonuses not working and paying employees a fair salary.
Recognizing innovation by filing patents or giving kudos is far more effective than any kind of cash reward or stock. People that innovate, innovate because they are given an innovative environment and are recognized for their creativity.
Innovation is important, but no more then many other elements such as getting the job done on time. A startup needs innovation in most cases, but not unlimited amounts of it. Getting the product released on time can be just as important.
Innovation should be rewarded where it is needed, but not in every case. If someone suggests 10 ideas, but non of them are good enough to be worth developing, then it is not beneficial to the company, and creates noise.
Employees should be encouraged to innovate, but in a way that does not throw the company out of focus. They should write down their ideas, and bring them up when the next version is being designed. Since it is their job, no special compensation is needed. Giving people credit should be enough of a compensation.
You need an array of "rewards", most of them non-financial (most of my developers have told me that that they value cash, but also value time & growth more). So: