Pay and motivation, yet again

I said (didn't I say?) that I thought we'd start seeing more scepticism about the value of performance-related pay. The HBR piece I linked too is a decent run-through of some of the academic stuff on this, and it's pleasing to see this kind of thing starting to get prominence.

But it's not just a theoretical question. I was in a meeting in a company recently where the board rep didn't even bother arguing that performance-related rewards "work" to increase performance. They accepted our argument that it's basically junk. I suspect that a lot of board members accept this but - as this company suggested - investors don't give them a consistent message, and it's very hard to be the first mover.

Unfortunately most investors haven't really thought at all about the effectiveness of performance pay and most still seem to believe it is an unquestionably Good Thing. The most depressing result of this is investors getting hung up on trying to tie rewards to non-financial factors to try and encourage good behaviour (if you buy the overjustification/motivation crowding stuff this is actually a very Bad Idea).

Therefore, in my opinion, the best thing we can hope to currently is to try and undermine belief in the value of performance-related rewards. If you're interested in joining my little crusade on this topic, here's a list of pretty easy reading books that will give you more ammo...

–      Drive: The Surprising Truth About What Motivates Us – Daniel Pink

–      Punished By Rewards: The Trouble with Gold Stars, Incentive Plans, As, Praise and Other Bribes – Alfie Kohn

–      Not Just for the Money: Economic Theory of Motivation – Bruno Frey

–      Motivation To Work – Frederick Herzberg

–      Why We Do What We Do – Edward Deci

–      The Hidden Costs of Reward - Mark Lepper and David Greene

–      The False Promise of Pay for Performance - James McConvill

Quick links

The FCA has published a couple of papers using behavioural economics:

The first paper focusses on how consumers choose and use financial products, and how behavioural biases can lead to firms competing in ways that are not in the interests of consumers. The second explores how best to encourage consumers to respond to customer contact letters. 

More here.

And a couple of HBR blog links. This bit on Hirschman, and this bit on pay vs motivation.

If there is hope, it lies in the unions

I'm a bit slow sometimes, but I hadn't realised that Richard Rorty was quite into class politics (he was brought up as a Trot!). I managed to pick up a very cheap second hand copy of Philosophy and Social Hope (on the back of this quote) and have been very interested by the more political essays in it. One of them is "Back to Class Politics", which is basically a defence of the role of trade unions. Quick snippet below:

Unless politicians begin to talk about long-term social planning... economic inequality, and the formation of hereditary economic castes, will continue unchecked... The most important single reason for hoping that American labor unions will become much bigger and more powerful than they are now is they are the only organisations who want to get these questions on the table - to force politicians to talk about what is going to happen to wages, and how we are going to avoid increasing economic injustice. If a revived union movement could get out the vote in the old mill towns, in the rural slums, and in the inner cities, instead of letting the suburban vote set the national political agenda, those questions would be on the agenda.

This chimes with what I've been thinking lately. I personally believe that one of the major negative aspects of Margaret Thatcher's period in office is that the labour movement was enormously weakened. The long-term impact of this is still being felt and, perversely, the affect on wages (ie labour can no longer claim the share of the pie) means that the state has to do more, and the welfare bill is greater. By nobbling the ability of workers to self-organise effectively the Tories shift the balance of workplace power in favour of the employer, and disempowered ordinary employees. That in turn required the state to play a more active role if we didn't want inequality to widen further than it has done.

As John Rentoul blogs 

the breaking of trade union power may well have gone too far: part of the problem with today’s labour market is that low-paid work is so insecure, with zero-hours contracts and so on, that it makes it harder for people to get off benefits.

Given the thoroughly depressing welfare 'debate' of the past week or so, this gives me some optimism about the future. If the debate is shifting on welfare than we either have to accept that economic inequality is likely widen, or we find a way of tackling inequality without the state. I hope we opt for the latter and for me the obvious answer is make it easier for workers to self-organise and, by extension, to expand collective bargaining. (In fact given the distaste for state intervention on both Left and Right, this might even be seen as a 'libertarian' response. The reality that most Right libertarians despise unions suggests that a lot of them are simply sweary Tories) 

It struck me the other day that much of the discussion around low wages sort of hints at this, but few people want to explicitly state what is, to me the obvious conclusion. Maybe one day we'll see 'strengthening trade unions' as a public policy solution to low pay! But at the least a focus on the low pay that requires the state to do so much redistributing may lead more people to think about whether we do need to rebalance workplace power once more. 

HP directors leave, chair steps down - a successful union shareholder campaign

Hewlett Packard has been in a bit of a mess since the Autonomy takeover, and, in particular, the massive write-down it announced in relation to it. Shareholders have been increaasingly vocal in their criticism of the board, several of whom are still in place from the time of the Autonomy deal. 

Two weeks ago Hewlett Packard was hit by a serious push against three of its board members - chair Raymond Lane and directors John Hammergren and Kennedy Thompson. Lane saw a vote of over 40% against his re-election, and Hammergren and Thompson were re-elected with an even narrower margin. Then, this week, Lane announced that he was giving up the chair (but staying on the board) and Hammergren and Thompsonannounced they would leave the board entirely.

This is, clearly, a significant win for shareholders who felt that the board needed refreshing, though obviously there is more work to be done. The interesting thing to note is how much involvement the US unions had, through CtW Investment Group. In addition to pushing for Hammergren and Thompson to go, they were also active linking up HP shareholders. I don't think it's overselling to say that the outcome may not have been the same without TU involvement. (And if you're interested they are going after JP Morgan next.)

This kind of campaaigning takes a lot of work, but the HP example shows that you can get results. There's a lesson here for UK unions, and, now that we have TUSO on the scene, maybe we will see something similar develop here.

Shareholder oversight of executive pay

If we argue that executive pay is purely the preserve of boards and shareholders, and we accept the reality that - despite being intermediaries who do not have the economic interest in the shares held - asset managers are the 'shareholders' that get consulted on and vote on exec pay, then, essentially, executive pay is overseen by part of the City. What could possibly go wrong??

Here's a very honest view from F&C - 

“Our job as asset managers is not to serve as arbiters on what is fair and not fair in a societal context.”

So don't expect giving shareholders more power to do much more than result in pay policies that are acceptable to asset managers, including massive bonuses and incentives.

The Council of Committees of Institutional Shareholder Investors (working group)

Regular readers will know I have developed a bit of a geeky interest in the various failed attempts by the UK's institutional investor trade bodies to form an effective collaborative body. I think Paul Myners effectively killed the Institutional Shareholders Committee by regularly drawing attention to its ineffectiveness when he was a Treasury minister.

Since 2010 the ISC has been revamped twice already, first as the Institutional Investor Council (in 2010) and then again in 2011 as the Institutional Investor Committee. Along the way the Association of Investment Companies, a long-time member of the ISC, dropped out - something that no-one apart from Responsible Investor seemed to spot. (As an aside, I find it surprising that more financial journos don't probe this kind of thing - imagine if the TUC quietly announced that the GMB was no longer an affiliate... it wouldn't go unremarked).

At the time of both recent relaunches it was promised that the "new" body would foster collective/collaborative shareholder engagement, but I don't think either version of the IIC has actually done so? Instead, again in line with previous experience, the group has been used as a stamp on policy work. Most troubling to my mind is the way that the IIC label seems to have been used as the voice of UK institutional shareholders in lobbying the EC on audit issues (ie against mandatory rotation etc).

Never fear though, last week saw the announcement of a plan to form a working group to discuss the setting up of a new body to... errr... foster collective shareholder engagement. I don't mean to be unduly harsh on the IMA which seems to want to give the idea (set out in the Kay Review) of an investor forum a proper crack. But a) we have been here several times before and trade bodies haven't been able to do it b) the limited nature of the announcement (even compared to the previous IIC statements) tells its own story and c) it's no secret that the asset management industry isn't chomping at the bit on this one.

A new dawn may not have broken...

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....