Statistics from the non-partisan Economic policy institute show that chief executive pay jumped more than 725 percent in 2013 in comparison to a 5.7 percent rise in the wages of average workers, this disparity between the highest earners and others seems to be widening
In the aftermath of the economic downturn, senior executives and bankers have been scrutinised and often branded as ‘fat cats’ because of their high salaries and substantial reward packages. This has led to outcries from various constituent groups to examine the pay of senior executives, bankers and CEOs more closely. From a psychological perspective paying more to those in charge may not actually be the most effective way of motivating them.
Does more money mean more motivation?
Ever since people started to appreciate management as a science it has been common belief that the most effective way of motivating employees is through the use of wage incentives. More money = more motivation; is the mantra followed by most firms. The psychological explanation is that an individual is most motivated through the use of external rewards like increases in salary and bonuses; this method is often referred to as extrinsic motivation. The reasoning is that human behaviour is goal orientated. So bankers and senior executives are motivated to increase their efficiency in order to increase the incentives they receive, in theory.
In 1972 Edward Deci argued that there is another way to motivate. There are certain behaviours that people will do and do well, not for any tangible rewards but instead for their own inherent rewards. These behaviours are intrinsically motivated. Deci wondered whether these two types of motivation could coincide with each other. What he found was that the more tangible rewards one received the less intrinsically motivated one was. Basically if you are motivated by money, that is likely to be the only thing you’re motivated by. Bankers are rewarded with huge bonuses and rises in annual salary so you can say they are extrinsically motivated. But how does this tangible motivation affect how well senior executives and bankers work?
Are the bonuses related to firm performance?
What does the data tell us? If senior executives are being paid more and their firms are benefitting from this increased motivation then surely large salaries are justified? Well data into the relationship between senior executive pay and firm performance is contradictory and inconclusive. Some studies show that the more they pay out the higher the firm performance is, others find no relationship between the two. Some senior executives may argue that firm performance is a poor indicator of individual performance though. Some firms have good senior executives but perform poorly others have poor ones and perform well. It seems like firm performance is influenced by a whole bunch of different factors.
Excess pay – creativity and company morale
Psychologist Dan Pink recently argued that over incentivising actually dulls thinking and creativity. A study by the Federal Reserve Bank into different tasks unearthed some interesting truths about how different types of motivation can impact our cognition. They found that the more money you paid individuals the poorer their performance was in certain tasks. Anything involving mechanical skill, bonuses worked as expected, the higher the pay the better the performance. Once the task involved creativity, thinking outside of the box or even ‘rudimentary cognitive skill’, a larger reward led to a drop in ability.
One step further, do these big wages effect team morale and chemistry within organisations? Yes, negatively. There is evidence to prove that paying senior executives too much money can lead to unrest amongst those that are underpaid. The more income equality in an organisation leads to more emotional distress in employees who are paid less. This is because relative wealth is just as important as absolute wealth. Business psychologists refer to this as the equity theory. An individual considers that they are treated fairly if they perceive the ratio of their input to their outcomes equivalent to those who are around them. Businesses may find that those lower down in the organisation will not work as hard because they see the disparity in wages as being unfair.
Why do we keep paying our bankers and senior executives these large sums?
Many people refer to the tournament theory. This happens when wage differences are based not on marginal productivity but instead on relative differences between the individuals. Basically companies pay huge sums of money to senior bankers to motivate those below them to work harder for promotions. By encouraging this type of competition within the company they believe it means everyone will work harder. But since the majority of incentives are offered in the form of immediate tangible rewards it has been argued that this has led to increased risk-taking. Large incentives mean they deliberately ignore long-term risks in pursuit of short-term goals.
What actually works then?
Well from a psychological perspective it is obviously abit more complex than just paying more. Just paying more decreases intrinsic motivation, encourages risk-taking and discourages those in the company working at the base. What businesses should focus on instead is not simply just rewarding CEOs, bankers and executives with more money but instead try to intrinsically motivate them. One way of doing this is by rewarding them with stocks. By doing this you give them a higher shareholding which means they become more dependent on the companies wellbeing. Every move they make will directly affect them. It means they become one with the company in a sense. This type of intrinsic motivation has been proven to encourage creativity and innovation.
Questions may be raised when offering those at the top higher share holdings. It’s basically giving more power to those who have the majority of it already. People suggest that this means they have less people to answer to and can distribute large contracts to themselves. However, if you create a board independent of any senior executives, a board tasked to manage salaries and compensation/rewards in order to review and control remuneration thereby ensuring wages and bonuses stay at the desired level.
It’s definitely a business model that works. Companies such as John Lewis and Ben & Jerry’s, have followed a business plan of rewarding executives with share holdings as opposed to monetary rewards. These companies have proven that it is a successful and sustainable model. It is not just a case of increasing motivation, but with less monetary incentives wage disparity between the highest and lowest incomes within the company shorten. Less differences between wages results in higher work satisfaction right the way through an organisation.
Maybe these large bonuses are more of a hindrance than help. There is still a difference between what science knows and what business does. Science has proven that the extrinsic methods used to reward executives only works in a rare set of circumstances. The secret to high performance is not found in rewards and punishments but instead as a result of unseen intrinsic drive, the drive to do things for their own sake and benefit.