Making Executive Pay Work: The Psychology of Incentives

Overview

A global study into the impact of pay and incentives on senior executives.

There is an emerging consensus, at least in Western economies, that there is something deeply flawed about the current model of executive pay. Put at its simplest, executive pay has risen dramatically over a period when, in hindsight, the Western economic model has not been at its most successful. Surely something must be wrong?

The debate about executive pay has focused on whether shareholders are getting what they want, whether current levels of executive pay are acceptable to society and whether remuneration committees are doing their job properly. But surprisingly little attention has been paid to perhaps the most important constituency: executives themselves. If executive pay were genuinely motivating executives towards higher levels of performance, with benefits for all, there would surely be less controversy about the subject. But is it? Does the current model really work for the individuals it is meant to be motivating?

Last year, in conjunction with Dr Alexander Pepper of the London School of Economics and Political Science, PwC carried out an initial study in the UK which was designed to test how company executives value and react to different types of pay. The study was driven by a belief that the fundamental model of executive pay in the UK was flawed and that in order to fix the problem, we had to go back to the basics of human behaviour. The resulting report was a revealing indictment of many of the features of the current executive pay model. In particular, it provided insight into why long-term incentives often just don't work.

The next step for us was to discover if the same results hold true for executives globally and this report explains the findings of a comprehensive study of executives across 43 countries. The results illustrate much of what's wrong with executive pay - and there is plenty wrong - but also what works. Some of the regional and country differences in attitudes hold valuable insights for leaders of multinational organisations. We hope it will prove an important contribution to the debate over executive pay.