The longer executives have to wait for pay, the less it is to worth to them. This finding, from new research by PwC in conjunction with the London School of Economics and Political Science, comes at a time when shareholders and regulators have been pushing for greater deferral of bonuses as they seek to curb excessive risk taking.

The Psychology of Incentives, published today, is based on research which included surveying around 100 senior executives within FTSE 100 and FTSE 250 firms to test their reactions to different types of pay scenarios. Participants 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 results to all related questions 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 also highlights that the perceived fairness of pay is fundamental to executives. Even if individuals are paid a top market rate, if they find out average pay in their firm is substantially higher, they will be less motivated than someone at another firm earning a lower market rate. This is according to 60% of respondents.

Dr Sandy Pepper of the Department of Management at the LSE commented:

“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.”

Other significant findings include confirmation 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.

Tom Gosling, remuneration partner at PwC, commented:

“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.”

Indeed the report shows that financial reward is not always the answer, with the research indicating that on average executives would be prepared to accept a pay cut of 50% for their dream job, perhaps doing something completely different. A quarter of respondents prepared to take a 70% cut. However, given the relatively high salaries of many of the participants, this would no doubt still limit career options. Just 5% of respondents would not take any cut for their ideal job.

Ensuring rewards are tailored to an individual’s motivations, relevant to their needs and easily understood, is one of the main conclusions of the research. Survey participants devalued potential awards if they were constructed in a complex or ambiguous way – an unfortunate feature of many incentive plans.

Tom Gosling, remuneration partner at PwC, added:

“Complexity should be avoided, but an apparently complex scheme that is relevant is better than a simple scheme that has no connection with the day to day work of executives. The plan should not seem complex to the person it is designed to motivate.

“Ultimately the flaws in the current executive compensation model are well recognised by shareholders and remuneration committees. There is less consensus on possible solutions. Our research suggests more focus needs to be placed on the psychology of the individual to which pay plans relate, rather than a one size fits all approach.”

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