Friday, 18 September 2009

(not) in it for the money

I've had two or three conversations over the past few days where a sentiment I share, but didn't expect to hear from investors, was voiced - namely that remuneration isn't that important when we're thinking about the motivation of directors. It also comes as there is an increasing trend to argue that remuneration wasn't a significant driver of behaviour pre-crisis (again I broadly agree).

Clearly people are motivated by a variety of factors - and money is definitely one of them - but to date shareholders haven't really given much thought to this. Instead investors' approaches to remuneration (as a proxy for motivation) are often still based on the very simple idea that you should tie pots of cash to outcomes you want achieved. Therefore the mainstream response to remuneration 'reform' in the wake of the crisis has inevitably been to seek to make sure the outcome (results) is measured over the long-term. From this perspective it's simply a question of designing better targets.

There is some evidence that this is a legitimate concern, though it seems to be the case that it is a problem where rewards are tied to a very specific kind of outcome that genuinely is quanitifiable. In contrast at board level you do have to wonder if we could ever design targets that would capture the sorts of behaviour we want directors to exhibit. What's more some of the metrics that underpin remuneration seem to me to be based on things are hard for the board to personally control. The result is that they end up getting extra reward for performance that may be generated elsewhere.

And finally, the trend to multiple performance indicators which all feed into a performance assessment that drives reward just feels wrong to me. If factor X accounts for 10% of the calculation of your bonus/LTIP/whatever, should you only spend 10% of your time seeking to manage it? And is a director realistically likely to respond in such a way, dividing up their time to ensure that they hit each metric? I don't think so, and if not then what is the point in it being in there? The director will effectively simply be rewarded if, by chance, the company happens to do well on factor X.

In general then, a lot of the investor approach to remuneration seems to have been driven by a desire to address a problem that may not be there (or not matter as much as agency theory would suggest). Perhaps that's why there is currently a bit of chatter about pay versus other types of motivation, and I hope this discussion goes somewhere.

As the man said:
"You have to realise: if I had been paid 50% more, I would not have done it better. If I had been paid 50% less, then I would not have done it worse."


Nick Drew said...

I'm sure you have a lot of research on this at your fingertips, Tom, but in my experience bonus is a real cult / fetish issue, way more than salary and probably more than the £££ involved

the thought of being awarded that discretionary something extra really grabs the attention of mortal beings, who will do almost anything to be acknowledged & treated thus

(it should carefully be distinguished from commission which is quite a different matter)

[it has the same economically irrational quality in 'our' culture (and that includes a very large part of the world, see anecdote below) as other types of public esteem do in other cultures e.g. in Arab culture, for some reason, being offered longer credit by a vendor betokens that you are trusted in a very meaningful and gratifying way - and they will cheerfully pay extra - which clearly they must, to cover the credit-risk & time-value aspects and the bank guarantees involved - in order to be granted the longer credit, which in simple economic terms is usually daft]

anecdote: I once had to set up and staff an office in Russia, to service dealmaking activities by US and UK commercial types for whom bonus was significant. the Russian locals were admin staff and, under company rules, didn't qualify for bonus: but I could tell (it wasn't hard) they were utterly fixated by the Cult of Bonus

so I obtained approval to set up a tiny local bonus scheme, the amounts available under which were notional at best

I was feted as some sort of minor deity and enjoyed their fervent loyalty thereafter (which, they very openly stated, was in large measure due to this scheme) - and I am utterly convinced that a commensurate salary increase would not have had the same effect

this is real human psychology: it runs deep & it behoves us to understand it

Tom Powdrill said...


Sorry for lack of response, busy busy!

Nick Drew said...

and, so, err ... ?

the suspense is killing me