In response to Prof Adrian Furnham’s recent talk at the High Pay Centre, deputy director Paul Marsland reflects on the concept of motivation
Film director Alfred Hitchcock described a situation in which an actor approached him with the question “What’s my motivation?”, to which Hitchcock’s answer was: “Your salary!” Hitchcock clearly thought of pay as a motivator, but then again he was also said to have believed that actors should be treated like cattle.
Of course the problem here is that the unfortunate actor even had to ask the question. I doubt Riyad Mahrez, Leicester City’s prolific striker, had to ask the same question before netting his recent wonder goal against Manchester City. Mahrez’s motivation was instrinsic, the actor’s clearly was not.
It is generally accepted by companies and investors alike that pay can and should be a primary motivator for executives at listed companies. The mantra of “attract, retain, motivate” is repeated almost universally in annual reports. This received wisdom that pay is the great motivator has been ever-present in company reporting during the astonishing rise in executive pay over the last 20 years. However, over the same period behavioural psychology studies have consistently pointed to the opposite. Not only does ever higher pay not motivate, but it actually demotivates those who don’t get it.
At a recent High Pay Centre event Professor Adrian Furnham made a compelling argument that high pay of the kind awarded to executives at listed companies simply fails to motivate. Prof Furnham points to academic theory as far back as Herzberg several decades ago, who identified pay as a “hygiene factor” that is successful in preventing job dissatisfaction, as distinct from a motivational force.
Despite evidence that humans just aren’t motivated by pay remuneration consultants, companies and investors persist in the pretence that it is the possibility of receiving more pay that somehow motivates the performance which triggers today’s multi-million pound pay-outs.
Worse, this pretence that more pay will motivate better performance has led to the mistaken belief that this will work not only for better financial performance, but also for improved environmental and social impacts. The demand for and inclusion of “ESG” (environmental, social, governance) metrics in bonus schemes is starting to make the beneficiaries of such schemes look faintly ridiculous.
Consider the recent announcement by Chipotle, the US fast food company, that its CEO would get a reduced bonus after customers were made ill by eating its food. This amounts to a statement that the CEO needs more pay in order to work towards something that should be taken for granted. In this instance pay is quite literally a hygiene factor, but not in the way envisaged by Herzberg.
So what is driving this change from intrinsic to extrinsic motivation?
Prof Furnham suggests that disclosures (aka “transparency”), which could not exist without this switch to extrinsic measures of performance, are the culprit. A return to secrecy could, he suggested, mitigate the negative effects of high pay. There is a caveat. Comparative fairness is the most important issue, but only where you cannot clearly link pay to performance or justify a differential. Of course it is extremely hard to link an individual CEO’s specific actions in a year to the movements in a group’s financial statements in the same year. Without this clear link a sense of unfairness grows. This is true even among already highly paid individuals, the CEO’s peer group. So if peer comparison is the driver why not simply cut off the disclosure which feeds it? Well, apart from the obvious point that pay disclosure is legally required, disclosure has given birth to commerce.
Once disclosed, performance metrics can be monetised. In fact a principle risk for the business models of proxy voting agencies is the cessation of disclosure.
ISS is the dominant voting service provider and has a clear commercial incentive to promote the idea of executive pay as a motivational tool. In its 2015 benchmark policy recommendations, ISS states that executive pay practices “must be designed to attract, retain, and appropriately motivate” key employees. When voting on the inclusion of ESG metrics in pay schemes ISS will consider “the degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation practices”.
It is not just voting agencies that depend on these disclosures for a living. Asset management firms such as Hermes market themselves to asset owner clients using an ability to analyse ESG disclosures as one of their credentials. For a fee, advisors such as Towers Watson will tell its corporate clients how they score against ISS pay metrics. Also for a fee, proxy solicitation agencies like Georgeson will advise a company on the likely outcome of a pay vote based on knowledge of the metrics used by voting agencies and their clients.
The monetisation of metrics doesn’t stop there. Remuneration consultants, including accountancy firms, get a fee for advising on which metrics should be used and how. Rating agencies like MSCI use remuneration data to construct ESG indices, journalists from broadsheets to trade mags also pore over pay disclosures to provide their copy, campaign groups including the High Pay Centre, reference pay metrics in their research, data providers like Manifest capture every detail of company pay schemes for use in their own research or for sale to other research providers: the list goes on. When a company releases its pay details you can be sure that nothing is wasted. The whole beast is consumed from hoof to tail.
So if secrecy is the key to restraining high pay is all this healthy economic activity reason enough for retaining the current disclosure system?
Pay secrecy and sustaining economic activity are not mutually exclusive. Changing the disclosure regime doesn’t mean cutting a vital source off for the commerce that flows from it.
The fact is that companies only disclose pay details for individuals who have received or who will receive the pay being disclosed. In Prof Furnham’s view these people form the peer group which is critical for the development of a sense of unfairness, and the resulting upward ratchet of pay. But what if disclosure was to include those who didn’t get what they wanted? How many companies turned down a candidate who wanted too much? How many remuneration committees never get the credit for holding the line because investors never knew they held the line?
This changes the peer group. Suddenly the company is cast as a hero for being prudent with shareholder funds. The CEO now looks clever for not pricing himself or herself out of the market. Companies have a good news story to tell that has not been told. At once there is a good reason to pay less.
Disclosure of excessive demands needn’t be explicit. The benefits of such disclosure doesn’t require names to be named. A simple statement that confirms that a committee didn’t accede to the highest demand would suffice.
It will be some time before BIS conducts a formal review of the UK pay disclosure regulations. Let’s hope between now and then that successful companies start to say how much was too much and that Leicester City wins the premier league.
The slides for Professor Furnham’s talk can be viewed below: