Ideas matter

A those people who have persisted with my blog outpourings for some time will know, I've become quite interested in the effectiveness (or otherwise) of performance-related pay. Looking back through my own archives I can see that I started seriously blogging about this about three and a half years ago (about the half the life of my blog ago!). So back in Jan 2010 I thought there were the first stirrings of interest in the investor community about the motivational aspects of incentives.

As I've tried to make clear in my own burbling on this topic, the idea that performance pay may not be effective - at least beyond basic tasks - has been debated for some time in psychology. Of course the main burst was in the 70s with Deci et al, but you can go further back to Frederick Herzberg, Douglas McGregor etc for older theorising about motivation at work that might lead you to query incentive pay. This stuff is well known in its own field (and in HR probably) yet has been almost invisible in corporate governance until now.

Unfortunately, agency casts a very long shadow in my microcosm, and with it comes a very basic economic theory of motivation. Essentially it boils down to the idea that people - managers in agency theory - will basically shirk, or pursue their own interests, unless they are 'bonded'. Contracts, and incentives, can be used to achieve this, with the ultimate aim being behavioural control via these tools to ensure managers are aligned with shareholders.

This stuff still has a real hold on many corp gov people. People who are basically well-meaning think they can achieve something worthwhile by incentive design - either ensuring that managers are controlled or, by bringing non-financial targets into the mix, trying to encourage them to ensure social and environmental factors are taken seriously. In my experience it can be very difficult to get people to shake off these ideas, call it ideology, hegemony or whatever, but for a long time performance pay has been seen as A Good Thing in corp gov land.

However, I do think my optimism of a few years back was well placed, and there are increasing signs that the supertanker is turning. Only today I received something from the Hay Group including a discussion piece on the pros & cons of financial incentives. This follows the work PwC have done in this area - which is genuinely sceptical IMO - and I know that Towers Watson held a client seminar on the same sort of topic (which they wouldn't let me go to).

Perhaps not unrelated, at the same time there has been a steadily increasing level of interest amongst some investors in the motivational questions about pay. Most pleasing to me has been the (still rather small!) number of conversations I have had with corp gov people where they already know the outlines of the criticisms of performance pay (eg that it works for simple, measurable tasks). This was not the case until recently.

Of course, what really matters is practice, and the test of this ultimately will be whether companies shift away from their reliance on performance pay. That is going to be a battle. But I do think that the ideas here are changing, and that is why we are starting to see remuneration consultants talk about them. I think we're going to be seeing more policy discussion of this stuff, so lets hope this is start of a significant shift away from performance-related reward, and the excessive pay it results in when applied in the boardroom.