The psychology of incentives

There are a couple of encouraging signs that investors are starting to query the idea that redesigning incentive schemes yet again is likely to deliver any real benefits. Regular readers (yes, both of you) will know that this is an issue that I've been banging on about for a few years now, so I'm pleased that the argument does, finally, seem to be shifting.

First up, LAPFF has published a paper on employee engagement which basically argues that investors spend too much time focusing on a) board directors and b) financial incentives. It says that instead investors should be looking at how companies engage their employees, and that when this issue is looked at in depth it's pretty clear that monetary rewards are a small part of the story. If you've read any of the behavioural stuff in this area some of it will be familiar to you, but I think it's the first paper by an investor group that really pushes these ideas.

Separately, I just came across this paper by the Aus arm of BlackRock. What's interesting about this one is that it includes a big section on what motivates executives. This draws significantly on the recent PwC work on the psychology of incentives. I personally don't think the paper actually moves that far (and it may surprise some that it emphasises the role of short-term incentives, though this is where hyperbolic discounting points you!) but it's surely significant that a publication by the world's biggest asset manager even covers this territory.

A final thought - it's interesting how influential that PwC paper is turning out to be. No doubt it's in part because it draws on the views of executives themselves, but I can't help thinking it's also because of who is saying it. A remuneration consultant criticising incentive schemes is more powerful. It's same effect that we see when Sir Michael Darrington criticises the scale of executive reward. Sometimes, it's who delivers the message that matters. Lately the right people have been doing it.