Incentives have become so complex and volatile that they no longer motivate the executives at which they are aimed, according to new research, which questioned the effectiveness of deferred bonuses.
The research also found that many features of current pay packages mean that the value executives place on them is materially lower than the cost to companies of providing them. In many cases executives would be happier being paid a smaller salary in a less complex and less volatile form, the findings suggested.
The Psychology of Incentives study of over 1,100 participants, from financial services from PwC in conjunction with the London School of Economics and Political Science, reveals that executives are risk-averse, don’t like complexity and discount deferred pay.
According to the research, deferred bonuses hold little incentive, with the majority of executives valuing a £100 of bonus in a typical deferral plan at only half its value.
Graham Ward-Thompson, remuneration and reward partner at PwC in Leeds, 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.”
Complex and uncertain incentives are also revealed as a massive turn-off for most people. The research showed 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.
Mr Ward-Thompson said: “UK executive pay is based on the motivational theory that loading executives up with large amounts of incentive pay with complex performance conditions means that they’ll perform better for shareholders. Unfortunately this isn’t supported by our study, which shows that complex pay plans are a motivation killer.”