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No more bonuses: Should Executives pay be fixed?

 

Two London Business School Professors – Freek Vermeulen and Dan Cable – recently penned an article making a strong argument for “Why CEO pay should be 100% fixed”. As a headline and assertion, it certainly draws attention, but it is also interesting to consider some of the arguments the pair make about the limits of performance-based pay, and the evidence they use to support them.

 

Of course, the subject of executive pay is always likely to be controversial – you only need to think of the recent shareholder revolt against the US $19.6 million pay package BP announced for its CEO, Bob Dudley. Some 59 per cent of shareholders rejected the sizeable package, a strongly-hailed sign of disharmony at a company that had just announced an annual loss of US $5.2 billion and job losses of around 7,000 by the end of next year. Perhaps notably, the revolt didn’t actually prevent the payout, though did prompt the company to state that they would look again at their future executive pay policy.

 

Performance pay = Better performance?

 

Cable and Vermeulen laid out five key issues with the performance-related pay which CEOs often receive – a critical issue when you consider that, as they suggest, something like 60 – 80 per cent of an executive’s total package can be tied to performance. Given that tremendous scale, their first argument – that performance-contingent pay is most effective with repetitive tasks, rather than for work requiring creativity and innovation – might raise some concerns. Citing research by Duke Professor Dan Ariely, the pair state that rewards and targets are far less successful in encouraging the creation of novel approaches to difficult and abnormal situations – an evident part of most executive’s day-to-day remit.

 

Another argument made is that performance-related pay, perhaps naturally enough, encourages a focus on performance. Leaders are encouraged by way of reward to fixate on specific goals. However, research conducted by one of the authors found that creativity improved when individuals focused on learning, rather than results, with a greater inclination to support their colleagues’ performance.

 

In essence, an argument against performance-related pay might come down to a suggestion that good CEOs don’t really require an external motivation to maintain or increase their high performance. They are already top achievers, and the challenges and development processes they have been through on the way to the top job will have equipped them with the internal drive to continue performing at their fullest. This doesn’t mean paying executives less, necessarily, but instead means being aware that bonuses and rewards for meeting targets any substantial impact on overall performance.
 
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