Wednesday, 3 March 2010

Pay and motivation, again

A couple more links that are worth a look. Behavioural economist Dan Ariely had an article in Wired recently that highlights some of the research he has done on the effect of rewards on performance. The story wil be familiar to those who are following this debate - performance-related pay doesn't seem to work, and may make performance worse.

The reader comments a worth a look too as they raise a number of regularly-occuring criticisms, primarily how can we compare these limited experimental results to what actually happens in the real world. Especially to how boards function. This is an important argument (though my own opinion is that the results would be the same) and Ariely is certainly on the lookout for someone to fund him to do some proper research:
I presented our results to a group of banking executives. They listened politely, and then they assured me that their employees' work would not follow this pattern. I said to them that with the right research budget and their participation, we could examine this assertion. They weren't interested.
I suspect someone in the investor community is going to leap on this soon.

Also through the comments I came across this paper. Here's the abstract:
We investigate whether bank performance during the credit crisis of 2008 is related to CEO incentives and share ownership before the crisis and whether CEOs reduced their equity stakes in their banks in anticipation of the crisis. There is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity (ROE). Further, banks with higher option compensation and with a larger fraction of compensation given in the form of cash bonuses did not have worse performance during the crisis. All these results hold for banks that received TARP assistance as well as other banks that did not. The incentives of non-CEO top executives are unrelated to bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; there is also no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis.

Again, this does not surprise me, and seems to be more evidence that the link between pay and performance (in that the former drives the latter) isn't there when we're dealing with tasks that aren't easily measurable.

I think one important point in all this is to avoid conflating two separate issues. I have no doubt that some people will work harder (longer hours etc) for more money, but that isn't the same as saying paying someone more money results in good performance. In addition I am deeply sceptical that those people who have jobs that require a lot of time and effort are really driven by how they get paid - you might need to pay them a big salary to get onboard, but once onboard I don't think they are spending a lot of time figuring out what they need to do to trigger their bonus.