Sunday, 5 June 2011

The psychology of incentives

There's an interesting little paper out from PwC's remuneration consulting arm with this title here which came out earlier this year. Basically they got the LSE to run some of the famous decision-making experiments (ultimatum game etc) on executives. And unsurprisingly, to me at least, execs aren't hugely different to the rest of us. This is even to the extent that many execs say that they would take a substantial pay cut to do something more interesting:
on average executives would be prepared to accept a pay cut of 50% for their dream job, perhaps doing something completely different. A quarter of respondents prepared to take a 70% cut.
It's definitely interesting stuff, as it's useful to have a bit of research on pay and motivation as applied to execs, because I've found that a common response when trying to raise these points in the 'real world' is the claim that the experimental evidence wouldn't apply to people at the top. Obviously research like this still isn't 'real world' but at least the subjects are the ones we are actually interested in.

The spin PwC put on it is also interesting. In fact I think they are probably right to argue that bonus deferral probably reduces the attractiveness of the incentive. As a remuneration 'reform' for me it only really has value in preventing people for getting paid for illusory performance, and I'm unconvinced that it will really change attitudes to risk-taking (because of my general scepticism about the motivational effects of financial incentives at this level). But even in these limited terms it may not work very well (we'll have to see what happens in practice).

Similarly the 'fairness' point that PwC make is pretty solid, as it seems that (above a certain basic level) many people are more concerned with relative rather than absolute level of reward. But for a pay consultant to make this point is surprising, since it also opens up the question of fairness from the point of view of other employees. More disclosure - particularly if BIS grasp the nettle in respect of internal pay ratios - will surely add fuel to the fire.

Finally, I have to say I'm pleased that the motivational aspects of pay at the top are being subject to a bit more of a psychological approach. I've felt like I've ben ploughing a bit of a lone furrow on this sometimes, given that 'common sense' views about incentive schemes dominate most pay discussions (even those about reform). So I wonder whether PwC have done this because they have picked up some scepticism in the market (perhaps from companies) about the motivational value of incentive schemes. What they have produced is interesting, but there is a stack more that could be said. It would be useful if investors were more vocal here.

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