The Psychology of Incentives 2024
Our new Psychology of Incentives research surveyed UK executives to understand whether there are opportunities to design remuneration strategies that are more highly valued by executives, more effective and more cost efficient for employers.
View Transcript
Since our first Psychology of Incentives survey, published in 2012, shareholder and broader stakeholder sentiment has evolved, with scrutiny in relation to executive pay continuing to grow. Further governance mechanisms have been incorporated within UK executive remuneration incentive structures, some in response to corporate governance concerns and others in response to shareholder views.
Key findings
For many, long-term incentives are not working effectively
- Executives believe strongly in the importance of remuneration to attract and retain talent.
- But only 41% think their company’s long-term incentive plan is an effective incentive.
Like the general population, executives are risk averse
- Most executives choose fixed pay over a bonus of a higher value - only 30% choose the higher risk bonus.
Discounting of deferred remuneration is high
- Greater familiarity with deferred compensation structures - which have become the norm in the UK over the last 15 years - has not led to executives valuing them more highly.
- Executives continue to value deferred pay significantly below its economic value - a deferred bonus is typically discounted by almost 50% over three years.
Executives prefer multiple performance metrics to one
- Executives prefer to be assessed against a balanced scorecard of metrics, rather than on a single metric such as profit or relative TSR.
- Many would even choose a smaller, fixed amount over a bonus assessed on a single profit or relative TSR metric.
Pay positioning is important…
- Most executives would choose to be paid less in absolute terms if it was more than their colleagues, rather than more in absolute terms but less than their colleagues.
- But it is more important to be paid more than peers in the market.
…but recognition is a stronger motivator
- But above all that, recognition of performance (e.g. through a pay increase) is considered more important than absolute pay level or positioning relative to peers.
It’s about more than money
- Executives would take a 20% pay cut for their ideal job. And they would even take a 10% pay cut to perform their current job if it was at an employer that more closely shares their values.
- But when it comes to working abroad or taking on a Board role at a listed company, most would expect at least a 25% pay increase.
What can businesses learn?
To improve the efficiency of remuneration spend while recognising broader expectations, organisations should:
A. Aim for simplicity and explain residual complexity
Could the removal of non-mandatory deferral or holding periods benefit both the perceived value of the scheme and its understanding, while still meeting the objectives of the Board and shareholders? If deferral is removed, could it be contingent on the executive meeting a minimum shareholding requirement?
B. Consider a range of incentive structures and use these selectively
Either for different populations of employees, or according to the business context each year. Would time-based share awards be more effective in a period of uncertainty? Or stock options at the start of a transformation plan?
C. Operate a more segmented approach to incentives
Offering a segmented approach or allowing employees more flexibility to choose the remuneration structure that they value the most could be key. Just as personalisation of reward already exists for flexible benefits, is there an opportunity to do the same for incentives?
In all cases, there are likely to be trade-offs and any proposals would need to take into account the views of wider stakeholders - not just the participants. However, our research shows that there are opportunities to improve the effectiveness of incentives based on a better understanding from executives themselves of what they find motivating.
