Pay: What motivates financial services executives? The psychology of incentives

Financial services pay under the microscope

Over the past few years pay practices in the financial services sector have come under intense scrutiny. Driven partly by the belief that the banking crisis was in part caused by excessive shortterm risk-taking encouraged by a bonus culture, regulators, governments and shareholders in many countries have pushed for changes in reward in the sector, and in particular for an ever‑greater emphasis on longer term incentives

Last year, PwC (UK), in conjunction with the London School of Economics, studied how company executives make decisions about pay. The resulting report, The Psychology of Incentives, showed how current long term incentives models often don’t work in the way they were intended.

One of the strongest messages from our research is that financial services executives aren’t unique. Much of the debate about executive pay in the wake of the global financial crisis was focused around the banking sector, but it’s clear from our research that executives in FS think in a similar way to those in any other industry. The same rules and behaviours apply.

However, the findings have particular resonance for FS, given the economic and regulatory forces at play in the sector. Overall, the conclusions suggest that the favoured tools of many regulators and shareholders – deferral and often complex long-term incentive structures – may not produce the hoped-for results.