We take calculated risks all the time in our personal lives. Like day-trading on meme stocks (GameStop, anyone?) or asking a stranger out on a date. Some pay off, others don’t.

But taking risks at work? That’s a different story. Why try to push the boundaries of what’s possible or go all-in on a project when it’s so much easier to play it safe? The consequences of failing, after all, can be steep.

But there’s a problem with this way of thinking. Sometimes organizations want their employees to step out of their comfort zone and take a chance on high-stakes projects. These are the kinds of projects whose outcomes, if successful, can lead to enormous payoffs.

So the question for leaders is: How do you encourage risk-taking in an organization? This week, we’ll explore.

The cost of success

New research by Kellogg’s Jeroen Swinkels, and fellow economist Hector Chade, uncovers one way that companies may be able to get employees to take chances with their work.

Using mathematical modeling, they simulated the employer–employee work dynamic under the assumption that employees could work hard or not, and pursue high-stakes work or not. The model also accounts for the possibility that employees could play it safe with middle-of-the-road projects that are unlikely to flop but also unlikely to have a big impact.

Through a formal analysis, the economists determined that the key to an optimal employer–employee contract is an incentive structure that gives steep rewards for high-value outcomes—steep enough to lure employees away from mediocre work—and little-to-no punishment for low-value outcomes.

“You want to reward the extremes,” Swinkels says. “You punish failure less than you used to. You reward big successes more than you used to. But you also have to make it so that just-adequate performance is a little less comfortable and not as rewarding for employees as it used to be.”

The model’s optimal incentive structure validates the approach that several large firms, like Amazon and Google, have been using for years to get the most out of their teams and inspire innovation.

These companies “live and breathe this idea,” Swinkels says. “They have a culture of celebrating failure. And the model helps us understand why they might think that’s a good idea.”

Learn more about the research in Kellogg Insight.

Leaders go first

Here’s another tip for encouraging risk-taking on your team: set an example by taking more risks yourself.

According to Kellogg’s David Schonthal, “it might be tempting for the CEO or other top executive to sit back and wait for others to contribute” in brainstorms and other meetings. But this is the wrong strategy. “Instead, that leader should set the tone and model desired behavior by being the first or among the first to talk and intentionally putting a risky or vulnerable-sounding idea on the table: ‘This may sound a little out there, but what if we….’ That will instantly encourage others to do the same, opening up the group in a big way.”

Read more from David Schonthal in Kellogg Insight.

Abraham Kim, senior research editor
Kellogg Insight

Jessica Love, editor in chief
Kellogg Insight