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Is performance pay a 15-year experiment that has failed?

Performance-related pay does not work and in fact, could be counter-productive. The launch of our new report on performance pay last week prompted a lively discussion about whether bonuses and long-term incentives can produce the sort of behaviour shareholders want.

David Pitt-Watson, former head of the Hermes pension fund, prefaced his remarks with an apology. "How could we have got it so wrong," he asked. He'd been voting on executive pay packages since 2000 and arguing that pay should align management incentives with shareholders' interests.

However, he pointed out that our report had found a negligible correlation between remuneration and the company performance metrics used. "We've not managed to align the incentives and yet our whole system works on incentives......we've made a mess of it," he said. "If we are not giving incentives to people to do the right thing, then what are we doing? If they are given out willy nilly, how do we justify the capitalist system?"

Dr Ruth Bender from Cranfield School of Management, suggested that performance pay could even have the opposite effect of that intended. She said it was clear that it could work for simple tasks, but for more complex cognitive processes, it could actually be detrimental to performance.

"Attract, retain and motivate has always been the rationale for executive pay," she said - it was only recently removed from corporate governance guidelines. "It has always been rubbish; it's impossible to design a package that does that."

"We've got a really big problem," said Mr Pitt-Watson, who is now at London Business School. "The reaction of some in the corporate governance world would say, you need to get the formulas to work better, but I wonder whether they're right? Do we need to start opening up a new debate?"

 

The High Pay Centre is conducting a year-long project to examine the use of performance-related pay for top executives and whether it can be made to work better, funded by Lord Sainsbury.

The slides used by Steve Tatton from Incomes Data Services to explain the report are available to download.

Download report

Posted on 29 October 2014

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