Executive pay: we need to think beyond money

Five Minute Economist

Image © Herry Lawford

The main political parties have achieved near-consensus that something needs to be done about executive pay. There is an argument that Government has no role in this area, and that private firms, with all their incentives to seek greater profits are the ones best-placed to design pay schemes that work. Except that they are apparently not very good at doing just that. There is a growing body of research that shows that the link between pay and performance is simply not clear-cut. Studies by psychologists such as Dan Ariely have in fact shown that paying people to do things often makes a task less enjoyable and makes them spend less effort on it. 
So, we have a problem. If pay and performance aren’t so closely linked after all, then many firms simply aren’t properly incentivising the best people for the job to do the best job they can. It means that firms are likely to have higher costs, which feed into higher consumer prices, for no extra benefit. We aren’t putting resources to their best possible use because we aren’t getting the performance we are paying for. Read more of this post

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