Complex pay plans and delayed bonuses ruin work incentives
EXECUTIVE pay plans are so complicated that they fail to properly motivate staff, a study from PwC and the London School of Economics warned today, striking a blow to campaigns which push for more deferred remuneration.
Executives tend to be “risk averse,” and so do not like complexity and place little value on deferred pay, the study into incentives showed – for example, a deferred bonus of £100 will only be valued at £50 by the average executive, and £33 by the typical under-39 year old.
The complexity of pay plans also confuses staff and hits incentives, with the report concluding “most executives would prefer lower, less volatile pay over a complicated, potentially higher reward”.
The study also showed 51 per cent of the 1,100 participants favoured a cash plan based on profit targets that they understand over a more ambiguous share plan based on stock prices relative to other companies.
“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,” said PwC’s Tom Gosling.
“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.”