Sunday, 29 July 2012

Undead performance-related pay

The more I think about it, the more I think that a couple of recent developments in respect of performance-related reward for executives indicate a significant shift in opinion about motivational assumptions.

First up, if you read the Kay Review section dealing with pay it's pretty obvious that John Kay is a skeptic. He openly questions the value of paying bonuses, and draws attention to the way that performance-related reward might crowd out professional standards and/or attract the wrong kind of people. He seems to share the view that beyond a certain point, it really isn't about the money for many people. I don't mean that he thinks they don't care how much they are paid, but rather that tweaking reward systems isn't going to achieve a lot.

The Review's proposals - only pay extra reward in shares, and make executives hold them for a very long time - seem to me almost intended to do the opposite of the formal role of reward schemes. Kay is concerned about the potentially negative behavioural effects of short-term rewards, so he suggests we push the performance period right out. In other words, let's amend performance-related reward so that it has no immediate  effect.

You might think I'm overselling this, but at the Review launch last week, Kay was pretty strong on the way that we discount for the future. It really isn't much of a leap from this to the pay proposals.  If we defer the reward for 'performance' way into the future, it is unlikely to be valued much by the recipient and therefore won't exert much pull on executive behaviour.

In fact, if you accept my broader argument that performance-related pay is underpinned by a behaviourist psychological perspective then you ought to think that - from that viewpoint - pushing the reward way into the future is the wrong thing to do. Behaviourists argue that the reinforcer needs to be applied soon after the behaviour it is intended to reinforce. To state the obvious, if you only get your shares after you've left the company that isn't going to reinforce an action that you might have taken years earlier.

That's why I think that Kay's proposals may actually be a compromise designed to defuse the behavioural effects of performance-related reward within the existing system. I wonder whether Kay thinks such schemes are largely a waste of time, motivationally speaking, but has got the clear impression that there's not much appetite for scrapping existing practice. I have no direct evidence for this view, but otherwise the combination of the narrative about bonuses and the actual proposals on pay don't quite add up for me. And by the by, there's a great quote in Obliquity where he says carrots and sticks only work where you're employing donkeys and know exactly what you want your donkeys to do. I personally do not think that shareholder-focused remuneration systems can ever meet those requirements. I don't think John Kay does either.

In the same vein as Kay, Fidelity have come out with a proposal for "career shares" whereby directors would be required to hold at least some of their share-based rewards they receive until retirement.  Again, this must surely deaden any motivational effect of the awards. How can rewards of this nature have any greater motivational effect than providing a pension?

If, and it's still and if, we see executive reward develop in the way envisaged by Kay and others we will end up in a really odd place. We will continue to be providing performance-based pay, which has developed with the explicit aim of controlling/directing director behaviour, but it will be designed in a way that seeks to avoid any immediate behavioural effects. Performance-related reward will be in large part hollowed out - the schemes will still exist but without actually performing their supposed function.

In such an environment I think that "fairness" will start to become a bigger argument for performance-related reward (I've touched on this before). In fact Alfie Kohn made the point throughout Punished By Rewards that there is a moral argument buried in performance-based reward - if you do something well then you should get a reward, regardless of whether it motivates or reinforces. I suspect we're going to start seeing that line of argument supplant claims about motivation and/or alignment. But whilst companies and rec comms might use it as a way to defend performance-related incentives, arguing that executives deserve rewards might be quite a tough sell in an economy flat on its back with high unemployment.

Of course, all of this would be much easier to see, and easier to challenge if you disagree with it, if the motivational assumptions that sit behind various pay reform ideas were spelled out. But they very, very rarely are. As a result performance-related pay will likely continue to be widespread - and unthinkingly advocated - despite the fact that schemes aren't doing anything, in a motivational sense.

PS. Obviously I'm aware that some people attach an amazing "aligning" quality to the value of shares but it's not obvious to me why motivational effects should be any different to cash-based rewards.

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