Executives Would Give Up Incentives for a Little Recognition

Did anyone catch the recent PwC report “Making executive pay work: The Psychology of Incentives”?

It’s quite a comprehensive report, working from the premise that executive compensation is flawed as evidenced by the massive increase in executive pay packages as compared to average employees for seemingly little in return.

Key findings of the report were (quoting):

Executives are risk-averse

• Most people chose fixed pay over bonus of a higher value – only 28% chose the higher risk bonus.
• Executives in Australia and the UK are most risk-averse, those in Brazil and China most willing to take on risk in their pay.

Complexity and ambiguity destroy value

• Fifty percent more executives choose a clearer pay package than a more ambiguous one of the same or potentially higher value.
• Two-thirds more executives prefer an internal measure they can control (such as profit) as opposed to an external relative measure (such as total shareholder return).

The longer you have to wait the less it’s worth

• Executives value deferred pay significantly below its economic or accounting value – a deferred bonus is typically discounted by around 50% over three years.
• Discounts are particularly high in Asia and Latin America, with deferred payments being discounted by up to two-thirds in the eyes of executives.

It’s all relative – fairness is fundamental

• Most executives would choose to be paid less in absolute terms but more than their peers – only a quarter choose a higher absolute amount, but which is less than their peers.
• Fairness is much less important in Brazil and China than in other territories, but you can’t generalise about BRICs, as it is most important in India.

People don’t just work for money

• Participants would take a 28% pay cut for their ideal job.
• The result is very consistent, globally, with the lowest cut being 24% (India) and the highest 35% (USA).

The key motivation of a long-term incentive plan is recognition

• Fewer than half of executives think that their long-term incentive plan is an effective incentive.
• But two-thirds of participants value the opportunity to participate in their firm’s long-term incentive plan.

Now, I don’t claim to be any kind of expert on executive compensation. But I am an expert on the impact of recognition. That’s why I was fascinated in particular about this design recommendation from PwC based on the findings of the research (again, quoting):

Design recommendation:

• Money is only part of the deal – and recognition matters as much as financial incentives. Pay is as much about fairness and recognition as it is about incentives. Simpler plans can achieve the recognition benefit with less discount to perceived value.

The bottom-line: Executives are no different than any other employee in their need for immediate feedback, praise and recognition for their good work. In fact, one pharmaceutical executive quoted in the report said, “A clear and immediate reward for successes motivates people. Promises that extend way into the future demotivate people.”

As I often say, the only factor required to mark a person’s need for frequent, timely and specific recognition in the workplace is that they belong to the human race. Last time I checked, executives qualify.

Compensation experts among our readers, what do you think of the findings of this report?

As Globoforce’s Head of Strategic Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world. His articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

Comments

[Dan Walter]

Derek,

Great post. In response, as someone who focuses most of their work on executive compensation and LTI...

Executives are risk-averse

Executives are risk adverse, but I would argue that the risk is the economy and the market, not the type of pay program. When the global economy and markets were strong, most executives wanted LTI, with a basis in stock.

Complexity and ambiguity destroy value

Complexity is less of an issue than ambiguity. These are far more matters of ongoing communication and management policies than plan feature problems. Yes, plan features have to be understood, but executives are generally smart people who can understand virtually anything if they want to and are given the right information. As comp pros we need to be better at making them want to know more and then even better at giving them the right information.

The longer you have to wait the less it’s worth

The delay in a reward may reduce its value. BUT, the anticipation of receiving a future reward can also increase its value. It’s all about building excitement and communicating potential. In a poorly performing market this can be difficult, and if the comp/HR pros don’t understand how their businesses work they will have a hard time designing and communicating exciting programs.

It’s all relative – fairness is fundamental

Fairness, is a funny thing. It's only "fair" if someone gets paid MORE than their peers. Fairness seldom applies to the work and results delivered. I tend to recommend pay programs that are "just". In the US (and am sure elsewhere) we like to say that "justice is blind." Justice refers less to your peers and more to your own interaction with pay and results.

People don’t just work for money

TRUE. But they won;t work without money either. :)

Design recommendation:

"Money is only part of the deal – and recognition matters as much as financial incentives. Pay is as much about fairness and recognition as it is about incentives. Simpler plans can achieve the recognition benefit with less discount to perceived value."

This a reasonably valid statement. Recognition is a large part of remuneration. But, recognition is not delivered via pay or rewards, it is delivered via human interaction, both words and actions. The money and rewards are simply tangible way to validate that recognition, they are not, in and of themselves, recognition.

[E. James (Jim) Brennan]

Derek details timeless realities. The most effective consequences of behavior are clear, immediate, positive and certain. Individuals and cultures will vary on definitions and weightings, but the standards remain constant in identity.

AND they want "fair pay" as well, but the minimum threshold values of that hygiene factor are even more variable.