There is no such thing as a free lunch..
Except when you work at Google

Employee driven innovations and incentives are a tough combination, mostly because there is insufficient data regarding the success or failure of innovations. Also, the majority of innovations in the service industry are intangible, making them difficult to monitor and evaluate. Even if there was a way to assess innovations, the normal way of giving incentives does not apply here.
Because roughly 4 out of 10 innovations fail, it is wrong and even counter productive to hand out incentives only when the innovations succeed. This would lead to a peculiar situation since employees would rather focus on easy innovation with success on the short run instead of more meaningful and long term focussed innovations.Furthermore, when you compensate your employees on execution alone, the risk takers see that people who play it safe are getting promoted or receive other incentives, and they will stop taking risk and thus stop being innovative.
According to Dan Pink in his 2010 book "Drive", when a task gets more complicated than just following orders (like creativity and innovative thinking); the higher the incentive, the lower the performance. Also, rewarding what you want and punishing what you don't want, does not work! 

But what does work?
People want a fair amount of money for their work, meaning that the best motivator is paying people enough to get the issue of money of the table. Additionally there are three factors that lead to better performance and thus can be seen as incentives; autonomy, mastery and purpose.
Autonomy has been described in the employee empowerment part and means giving the employees the freedom and leeway to do what they want, when they want it, with whomever they want. Management is great if you want compliance, but if you want engagement; self direction is better.Mastery describes the fact that people want to get better at things without expecting money for it, like playing guitar or football. By not pushing people to do something, they will often do it faster and better than ever before. Why? Because they can! The top motivator for people to do their work: Making progress! Great examples of this are Wikipedia and Linux which do not rely on their employee to do the work, but rather on complete strangers with a passions for it.Purpose relies on the fact that people want to do something that actually has impact on something other than the company's profit. If we start treating people like people and give them a purpose to do their job (for instance help Africa) then they will get up in the morning eager to do their job. 

In short: You have to award risks and not punish failure. Most innovations fail or do not make a difference. A company that punishes failure, will have employees that stop sharing their ideas due to them being afraid of the punishment. They are incented not to.

Rules and incentives

Rules and incentives may make thing better in the short run, but they create a downwards spiral that makes them worse on the long run. The huge amount of rules that employees should obey has a crippling effect on improvisation and innovative thinking, and the sole purpose that they are in place is because companies do not trust their employees to run loose and think on their own. These rules are in place so that the amount of mistakes is limited, but at the same time, everything that is done is mediocre and according to the existing paradigm. 
Rules and standard operating procedures (SOPs) are the death grip on innovative thinking. They might work in the fast food industry and companies where the staff members have a below average IQ, but in companies with smart people who are able to think on their own, too much rules kill innovations. 
Of course, there is nothing wrong with rules, but there is a limit.  A Jazz musician needs some notes (rules) on the page, but the need to improvise is what his music makes good. Too many rules stop the musician from improvising, which may lead to him losing his gift or it may even make him stop playing altogether.