We stated in Part 1 that HR personnel is now required to be a strategy swami, a finance guru, an operations rock star, a behavioral psychologist Jedi to transcend and become an incentive ninja.
To recap some of the important observations of behavioral psychology:
Executives are inherently risk-averse. The majority would choose fixed payments over a possible bonus of higher value. Geographies influence the level of risk aversity.
Agency Theory states that it is essential that the executive and the company should be striving to achieve the same goals. Research has however shown that there is little correlation between schemes that incorporate Agency Theory and the share price.
If you reward executives for doing something, they lose interest in performing these tasks. Economists disagree and have found evidence of increased productivity.
One could be excused for now questioning the applicability of incentives – this is not the intention of these articles. Rather, the objective is to understand the science which influences employees’ perception of incentives so that these can be addressed. Further, any new incentive designs should incorporate, where possible, the tenets and findings of behavioral psychology.
Perhaps – however any company who elects to introduce a new and radical incentive design may face headwinds because it is contrary to copy-cat influences (“what our competitors are doing’) and may erode the EVP – unless it is adroitly communicated.
Professor Alexander Pepper in his article, “The Case against Long-Term Incentive Plans” which was published in the Harvard Business Review, October 2016 issue states
” My research suggests, somewhat perversely, that companies would be better off paying larger salaries and using annual cash bonuses to incentivize desired actions and behaviors. Additionally, they should require leaders to invest those bonuses in company stock (or should pay the bonuses in the form of restricted stock) until a certain share of leaders’ net worth, or some multiple of their annual salary, is invested”
According to Pepper, if executives continue to hold substantial equity, their interests will be aligned with those of shareholders. This alternative incentive design would achieve that aim without the confusion and inefficiencies of long-term incentive plans.
Given Prof. Pepper’s statement and the previous analysis contained in this article, what would the ideal incentive scheme look like? We would contend that the following scheme would be an option:
Cookies are small text files that are stored on your device (computer, tablet, or mobile phone) when you visit certain websites. They are widely used to enhance your online experience by remembering your preferences and actions over time. Cookies are not harmful and do not contain personal information like your name or payment details.
You have the option to manage your cookie preferences. You can usually modify your browser settings to accept, reject, or delete cookies. Please note that if you choose to block or delete cookies, some features of our website may not function properly.