Many highly-paid executives have said they would be happier with a smaller salary in a less complex form, raising doubt over the effectiveness of deferred pay schemes
According to a survey between the London School of Economics and PwC, pay incentives have become so complex that many executives are no longer motivated by them.
The survey of 1,100 participants found that increased complexity of pay measures had put upward pressure on pay levels, and deferred bonuses now hold little motivation. In many cases executives said they would be happier being paid a smaller salary in a less complex and less volatile form.
The Psychology of Incentives study concluded that because executives are risk-averse, they don’t like complexity and discount deferred pay.
The research found that two thirds more respondents favoured a cash plan based on profit targets that they understand over a more ambiguous share plan based on their share price relative to other companies. The more complicated the reward, the more likely participants were to choose the smaller but more certain reward.
Respondents were also more concerned about the perceived fairness of their pay in comparison to their peers than what they were paid in absolute terms.
Tom Gosling, head of PwC’s reward practice said, “These findings place a major question mark over the effectiveness of deferred bonuses, which have been championed by shareholders, regulators and corporate governance bodies as a powerful way of influencing behaviour while at the same time encouraging prudent risk-taking. It is difficult to see how a form of pay that has such low perceived value can have a significant influence on behaviour.
“A very real consequence is that as deferral increases, we would expect there to be pressure to increase pay levels.
“We need to simplify pay significantly. We’ve tried to put too much of the package into complex incentives that executives don’t value, and this is leading to volatility of pay-outs and unintended consequences. If we had simpler, less volatile pay plans then most executives would be happy to be paid less.”
Helen Roxburgh