Date: 27 Aug 2012
Nothing grabs the attention quite like a top executive pulling in a massive salary and significant bonuses. While many recipients may argue that they are worth it, does the idea pay for performance stand up in the after math of the financial crash?
Eleanor O’Higgins is on the faculty of the UCD School of Business and is a visiting academic at the London School of Economics. Specialising in business ethics and corporate governance, she argues that despite its continued prevalence, there is strong evidence that pay-for-performance does not work.
Is pay for performance an ill-founded dogma? It makes sense in an abstract way, the better people perform, the better people are paid. Practically speaking it doesn’t seem to work. There are all kinds of other considerations. Performance is a very complex thing, the higher you go in an organisation, the more multi-faceted performance is. A chief executive has to juggle so many different jobs and functions. How do you actually define performance? Usually it is an attempt to capture it in one statement, like profitability.
Also, when you reward one person, it suggests that all the profit is due to that one person. It may be that it was a multi-team approach. There are a lot of aspects that difficult to define what performance is and the way it is measured.
There is a certain lack of objectivity in measuring performance, you can manipulate the measure and the appearance.
When we talk about pay for performance, the idea is that it is fair, but the idea behind it is really if I don’t consider the incentives are good enough then I won’t bother. It doesn’t take account for the fact that people are complex and perform for many different reasons.
Can pay for performance also distort the goals of a business and affect corporate responsibility? People can be incentivised into engaging in practices that are irresponsible and even unethical. Sometimes people can be so hell-bent on the incentives they can lead people to forget all other considerations. It doesn’t matter how you do it, just do it.
What is alternative to pay for performance? I maybe old fashioned, but I am of the view that if I take a job, no matter what it is, that first of all I am held accountable to do that job. I have agreed that I will be paid a certain amount of money and that I will do that job. I would hope that I would want to as good a job as possible, I wouldn’t need to be paid extra.
Is it a good idea to put something alike a salary cap in place in certain situations? People who are self-serving will say that if you place a cap on salaries, you will drive out the talent. In London this has been a big issue, where London stands to lose its place as a world financial centre if they come down on bankers’ salaries. It hasn’t happened, people still flock to London.
Do you want to employ the type of person who would leave a city or country where they want to work to go work somewhere they don’t want just for that sake of making loads of money. When we are talking about the difference between €10 or €5 million, how many million does a person need.
What about the argument that if a company is making a profit, why shouldn’t a person contributing toward it get a share? There is nothing wrong with a percentage of profit. You can take a business model like the John Lewis partnership, where everybody gets a percentage of profits. It recognises that everyone is in it together. That probably does incentivise people who work there, when it recognises the team effort, that is fine. The point is that everybody has a day in it. It incentivises a company as a whole rather than being a zero-sum game.
It may not work when some people are picked out as being the stars. In banks it was traders and top level management that got bonuses, a lot of the people working in branches got caught up with the same reputation afterwards.
Where do public workers fit into the issue of pay-for-performance? The notion is the same, there has been an attempt in many countries to create a private sector mentality and incentivise people in the public sector.
Unless it is properly done, pay-for-performance can become a disincentive.
With incentives in the upper levels of the public sector in Ireland, everyone was seen to be above average in the performance management system. I don’t know what you had to do not to deserve a bonus. That almost perverts the whole system. In the public sector it is even harder to measure success. You end up with invalid measurements.
Could it be the case that it is the distortion of a pay for performance system rather than the system itself which is the issue? It is the mentality behind it that is a problem in making it work, it suggests that the only reason to work is for the money.
If a company has a great year or in the public sector a project has come to fruition, there is nothing wrong with recognising the people in some way or giving them a small honorarium.
Shouldn’t they have been working for the success of the project all along anyways? The idea that when you start concentrating on working hard to be very well paid, you crowd out the idea that people will work hard to make a project work or serve a project.
What are the international trends towards a change? Exorbitant pay is getting very unpopular. Shareholders are revolting and there is a backlash, such as the occupation movements. Now there is a much more watchful eye on what people are paid, not only bankers but also chief executives.
We will see, in good times people take a more benign view. It is only because there aren’t good times at the moment, if they return this dissatisfaction might dissipate.
The EU is looking at regulations to curtail pay for chief executives, especially in banks. Even if there is regulation, there are often ways and means of getting around it.
Interview by Philip Connolly, Sunday Business Post.