Why Performance-Related Pay Isnt

FEATURE:WHY PERFORMANCE-RELATED PAY…ISN’T required to operate PRP in any organisational role, worth the trouble? The research evidence is far from supportive. Looking at chief officers first, payments under simple bonus schemes are quite closely associated with firm performance. But of course, that is because in such senior roles, firm performance usually determines them. It is not evidence that bonuses cause or are necessary for superior performance. Ironically, there is now a strong trend towards complex bonus schemes, partly to incorporate more non-financial performance measures for a longer-term view. This move is motivated by the right principles, but complex bonus schemes are less sensitive to actual performance. Long-term incentive plans (LTIPs) don’t fare any better. There is evidence that their design is easily and regularly manipulated6 and that they handsomely reward average performance7. Executive share options (ESOs) might be expected to avoid all these problems. After all, they are surely very directly linked to the performance of CEOs and their top teams. Here, a different problem and interesting irony crops up. The more senior an executive, the more he or she is considered responsible for firm performance, having the remit to manipulate an extremely wide range of organisational variables. However, it is precisely the control over these variables that empowers executives – where they are so inclined – to make self-serving decisions at the cost of the company. We tend to forget, when granting share options (a ‘long-term’ incentive) that very often the executives receiving them will still be in control of the important levers when these options mature and tempted at that point to make short-term decisions to maximise personal rewards. It is often the dysfunctional behaviour that is delayed, as well as the reward. For example, the use of share buy-back schemes, which increase share prices (but not long-term shareholder return8), has increased in line