Executives would be happier being paid a smaller salary in a less complex and volatile form, according to new research.
A study of over 1,100 executives by PwC in conjunction with the London School of Economics and Political Science, suggests that many aspects of current incentive plans don’t motivate the executives they are aimed at.
According to the research, deferred bonuses hold little incentive, with the majority of executives valuing £100 of bonus in a typical deferral plan at only half its value. This discount is massively in excess of economic discount rates and the perceived value drops to as low as £33 for younger employees (those under the age of 39).
Complex and uncertain incentives are also undesirable. 51% of 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.
The research also suggests that executives are concerned about the perceived fairness of pay. For over half (51%) of respondents , getting paid more than their peers was more important than getting paid more in absolute terms (27%). While many countries are calling for greater disclosure on pay, the research suggests the opposite, with executives concerned that this will provide more opportunities for cross-comparisons.
Tom Gosling, Head of PwC’s Reward Practice says: "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. The more complex the pay, the lower the value in executives’ eyes.
“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.”