Bonuses are worth 20% less to executives for each year they are deferred, according to research from PricewaterhouseCoopers (PWC) and the London School of Economics (LSE).
The Psychology of Incentives report, published at a time when shareholders and regulators are pushing for greater deferral of bonuses to curb excessive risk taking, found that the longer executives have to wait for pay, the less it is worth to them.
Senior executives from FTSE 100 and FTSE 250 firms were asked to make a series of choices between a sum of money tomorrow and an amount at some time up to three years in the future.
Analysis of the results showed a discount rate for deferred pay of more than 20% per annum.
Tom Gosling, remuneration partner at PWC, said: “The extent to which executives devalue deferred pay calls into question the effectiveness of bonus deferral.
“A deferred incentive payable after three years will have a perceived value of only around half the level if paid immediately.
“Greater deferral of bonuses may therefore not have the behavioural impact desired and may also lead to pressure for increased overall compensation.”
The research found that 60% of participants stated that even if they are paid top market rate, they would be less motivated than someone at another firm earning a lower market rate, if they found out that average pay in their organisation is substantially higher than what they receive.
Dr Sandy Pepper, a fellow in the Department of Management at the LSE, said: “Implicit in the current drive for greater disclosure on pay is the assumption that transparency will shame firms and individuals into pay restraint.
“Our findings suggest the opposite will be the case. It matters less to individuals what they are paid in absolute terms than what they are paid relative to those they consider to be their peers.
“With disclosure levels set to increase further, it is vital that pay systems are perceived to be fair and are properly explained.”
The research also found that most executives are risk averse; three quarters of respondents were not prepared to give up £165,000 for a 50% chance of receiving £370,000.However, 25% were strong risk takers.
Gosling said: “Most corporate executives are not risk-taking entrepreneurs. Yet we load them up with highly geared incentives as if they were.
“It is hardly surprising that this leads to frustration and disengagement. However, around a quarter of executives are risk hungry and incentives for these individuals need to be tailored accordingly.The trick is knowing your audience and what motivates them.”
According to the report, on average executives would be prepared to take a pay cut of 50% for their dream job, while a quarter are prepared to take a 70% cut. Just 5% of respondents would not take any cut for their ideal job.
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