I've been banging on for a few years about incentives and motivation. It's been interesting to watch as the common sense that performance-related pay is A Good Thing has lost legitimacy. However even despite the growing awareness of problems with relying on incentives the practice has continued to expand. Some people in Responsible Investment are enthusiastic advocates, believing that tying ESG metrics to exec pay (for example) would deliver better behaviour. I'm sceptical to say the least.
A couple of recent examples demonstrate why this is a live issue. First up is the news that Neil Woodford and his firm have decided to stop paying bonuses. This decision has been argued in terms that will be familiar to anyone who has been following this debate - relying on incentives to get people to do things can actually encourage some pretty dodgy/damaging behaviour and/or crowd out intrinsic motivation to do the right thing. The Woodford example is particularly striking as it comes from the sector - finance - where reliance on incentives is most extreme. But perhaps we shouldn't get too excited. There's a good blog from Chris Dillow on why others in finance may be unlikely to follow.
And this leads on to the other recent story where performance-related pay was a big factor: the Deliveroo strike, which was ultimately victorious. At its heart was a new incentive structure. Rather than being offered basic flat rate with a small incentive on top, the company was proposing paying couriers entirely on performance - i.e. a payment for each delivery. This is of course simply piece work, and I know other delivery firms have used it, but it is dressed up by Deliveroo as somehow more "flexible" for staff. Essentially this model is 100% performance related.
If I remember rightly, the founder of Deliveroo comes out of investment banking so he is likely to be used to big incentives, and might be perplexed as to what all the fuss is about. It reminded me of a conversation I had with a private equity manager when he was hugely enthusiastic about paying bar staff entirely in tips. Why wouldn't anyone want to be paid like that, he asked?
This adds even more complexity to the incentives discussion - what if some people simply don't like being paid on performance-related basis? This is probably partly context. In the case of Deliveroo couriers, or any low-paid workers, this style of remuneration might simply represent an economic threat. If you can't deliver the performance at an effective rate you could lose out financially and be pushed close to the edge. This, of course, has been a big bit of the piece rate story through time. Rather than offering more to the worker, it just ends up being exploitative, or degrading. (The power dynamics around rich private equity types getting people to work for entirely tips don't feel quite right do they?)
But people also have different intrinsic attitudes to risk, competition and so on. No doubt there's an interplay here. People can learn to behave in a more competitive/self-interested way, and the use of incentives can facilitate this (let's leave aside whether this is desirable or effective, even in profit-driven organisation). But some people won't ever want to have more risk in their remuneration, even if they are well-paid - this was picked up by research done by PwC a few years back. It might actually only be a minority of people (maybe even executives) who like a large variable element of pay.
When you think about it, this is an even stranger part of the performance-related pay story. We are increasingly encouraged to expect to be treated as individuals, with our own tastes, values and so on. So why do companies/sectors employ a blanket approach to remuneration where often faulty assumptions are made about what we want and how we might respond to the use of large incentives?
Personally, I think that we will only get into a more productive discussion about remuneration when we abandon the assumption that "performance linkage" is an unqualified good, and an inherently desirable objective in pay design. That still seems like a long way off.
PS - Even where we have a company that needs entrepreneurial talent, and even where the executive(s) are amongst those that DO like a large variable element, we should not assume this marries well with what performance-related pay "reformers" are offering. I think it is likely that many entrepreneurs are incentivised by relatively short-term success. I think they may have to be a bit "short-termist" in their thinking to get over over all the barriers that face them. I don't think they are likely to be incentivised by share schemes that are locked up for years. But then that's another argument for not adopting a blanket approach.