Monday, 1 April 2013

Performance-related pay is still rubbish, now more people agree that it is

There's a great quote from the High Pay Centre in this article in the FT (worth a read anyway by the way), which I'll repost here -
"The whole issue of performance-related pay should be up for debate. Surveys of chief executives have found that it is not their main motivation – and it has become a serious source of friction between shareholders and company boards. Meanwhile, it has added hugely to pay complexity."
Absolutely, and I think this quote encapsulates the emerging critical view of performance-related pay. We had our annual corporate governance conference last week and what really struck me was the unanimous scepticism about incentive pay. As my regular reader (hello Mum!) will know, the inherent flaws in incentive pay is a bit of a hobby horse of mine, but for a long time performance-related pay has been an unquestionably Good Thing for many people.

Not any more though, a range of different players in the exec pay debate (including, importantly, PwC) are expressing more scepticism about performance-related rewards than I can ever remember. What once seemed like "common sense" now feels much more contestable.

I think the HPC quote is very useful as it sets out some of the key points that I think will become the new "common sense" about incentive pay, and as such that you will probably start to hear more often. These are the core ones I expect to become a lot more frequently heard -

1. Incentive pay doesn't improve motivation/performance - this is the one that a lot of the academic research has focused on and is obviously pretty fundamental. However, it's important to note that you don't have to believe incentives motivate to think they are worth providing - eg the view that performance should be rewarded.

2. Incentive pay increases complexity - very hard to argue against this, the only reason we have rem reports running into 20+ pages is because of the explanations needed for all the incetive schemes. Everyone says complexity is a Bad Thing, may as well tackle it at source!

3. Incentive pay legitimises large rewards that would be challenged if paid in fixed pay. This is an argument made by Sir Mike Darrington and is, I think, very important. If companies genuflect to 'performance linkage' or, even better, 'alignment' this will pacify some investors and allow them to get away with a lot.

Anyhow, encouraging signs....

No comments: