Pay and performance in the asset management business

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Pay and performance in the asset management business
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In a famous meta-analysis of 92 different samples, four American academics found a correlation of r*= 0.15 between pay level and job satisfaction and r= 0.23 of actual pay level with pay satisfaction. They concluded that level of pay had little relation to either job or pay satisfaction.

This suggests that within an organisation, those who make more money are little more satisfied than those who make considerably less. Contrary to many theories, the relatively well paid are only a little more satisfied than the relatively poorly paid. Yet people refuse to accept the validity of this study.

But most people are happy to take up one of three very clear positions on the topic: 

The standard view: Money is a simple and powerful motivator. Money motivates people, and extra money motivates people to work extra-hard and more productively. Employees compete when rewarded by money, which raises productivity or standards. It is not always possible to promote people, so money is a simple, effective, equitable way to reward workers. Money is accepted for all workers, at all times, everywhere – psychologists call this a general reinforcer. 

The sceptical view: Money sometimes, but not always, works. If employees are highly paid, money may not be sufficient as an incentive – beyond a level it has very little real effect. Money rewards may also set employees against each other, leading to conflict in the office – openness leads to conflict. It is also often difficult to determine the standard or basis for the decision to award the employee money. Why precisely are people paid as they are and what effect does this have on their productivity and wellbeing? If it is difficult to measure output/productivity, it is difficult to determine equitable pay scales.

The cynical view: Money rarely works as a serious, long-term work motivator. Money trivialises work, which for many professional employees should be its own reward. The amount received may not bear relation to what the employee actually does, particularly emotional labour. Indeed, if the employer finds it motivating to award money, perhaps the salaries are too low. Money as a major reward factor can paradoxically reduce intrinsic motivation – money is an extrinsic factor. There are many other and better ways to motivate employees than to simply throw money at them. Beyond a certain, surprisingly modest level it has little impact on either satisfaction or productivity.

The 10 issues

Below are 10 issues that can arise when trying to measure the relationship between pay and performance. 

1. This is a very difficult area to research because it is usually problematic to get valid data on any of the major factors of interest. It is very difficult to get robust and sensitive measures, particularly of productivity/output for any complex job; and there are a number of confounding, mediating and moderator variables between pay and productivity (such as age, personality and values) that are rarely measured. So, it is difficult both to prove and disprove any relatively simple theory such as that money leads to motivation, which determines productivity. There are too many 'it all depends' caveats.

2. There are various different ways of calculating total remuneration (ie measuring input or output factors or some ratio), which has an important impact on work style and output. In other words, you could measure hours worked or widgets made or a ratio of the two, as well as experience and qualifications etc. We have known for 100 years that the way we calculate pay has a profound impact on the way people work.

3. Changes in the way of calculating remuneration can have dramatic short and long-term consequences, as well as unintended consequences on many aspects of behaviour (such as teamwork, trust and work style). Change the formula and you can have real disruption; more so with the extrinsically motivated. Look at the history of public service strikes for evidence, when small changes in how wages were calculated were made.

4. The relationship between (overall, total) pay and general (and specific) job satisfaction is positive but very weak, with correlations around r= 0.10 and therefore accounting for little of the variance. Even for those extrinsically motivated, other factors like personal autonomy or trust in and admiration of one’s boss play a more important role. Money plays almost a trivial role in job satisfaction as long as people are paid fairly and at roughly market rates.

5. The relationship between actual pay and pay satisfaction is around r= 0.20, accounting for about 5 per cent of the variance. That is, there are many other factors that determine pay satisfaction than actual pay levels. We know that pay expectations, previous experience and personal attitudes to, and beliefs about, money play a more important role than the actual amount of money received.

6. Remuneration packages attract people to organisations but do not keep them there: ie it is implicated much more in job attraction than retention. It is easy to compare potential jobs by the package offered, which is why these facts are less and less clearly stated. The package, if clear (and honest) may be an attractant but it will not ensure loyalty or satisfaction.

7. One of the most powerful influences of pay on job satisfaction is the perception of fairness and equity. That is, how much others are paid relative to one’s own package is more relevant than absolute or total rewards; hence the saliency of pay secrecy. It is not how much you are paid, but how much your boss and colleagues are paid. 

8. Remuneration has to be sensitive to market forces, although it is difficult to get good data on what competitors are paying. Much depends on what people understand to be going rates and all sorts of rumours and exaggerations surround that. This is why advertisements rarely state pay, although wide scales may be mentioned.

9. Using remuneration as the major way of influencing motivation and satisfaction is misguided. Money as ‘carrot’ or ‘stick’ has very limited effects. Other factors like work autonomy, interest and management style are more important in the long run and short run. This seems to be particularly the case with millennials.

10. The relative attractiveness of aspects of the remuneration package (eg shares, deferred payments and housing/health benefits) are very different for individuals, depending on their background and demography. 

What makes asset management different

Compared to most other jobs asset managers are very well paid (they are in the top 5 per cent of the population). It is an extrinsic motivation factor that clearly attracts many to the job and retains them (given other factors are in place). In short, money seems more important, more motivational and more sensitive than any intrinsic motivational factor suggested by the gurus.

The ratio of bonus to base pay is high, relatively similar to some sales jobs. This means the reward stress is on personal effort and ability rather than contribution. It also means that people at the same level, with similar title and experience may be very differently remunerated from one another.

Many asset managers, but by no means all, have some equity ownership in their organisation, which has implications for how all others are motivated in the business. We know that having a real stake (shares) in the business can change commitment, and influence a long versus short-term horizon.

A significant proportion of their pay is often deferred. This has an effect on all sorts of decisions in the job, depending on the terms. It can easily change time horizons and commitment to others. 

It is often possible to obtain reasonably robust, objective, money-based measures of success that can be expressed nearly always in monetary terminology, making subjective judgements less central to the whole exercise. Numbers do not lie and are easy to compare.

Pay systems are often company-wide with nearly everyone in the same system, which may have implications for social comparisons. This can lead to all sorts of jealousies and certain areas/specialities are seen as easier (to make money) than others. Pay secrecy/privacy is maintained which has many consequences, both very positive and negative.

Pay, performance and your business

The stereotype of people in business is that they are highly competitive, numerate and materialistic. They are attracted by the money and are prepared to work very hard, leading highly stressful lives.

In this sense they are prepared to trade-off quality of life for quantity of money. The aim is to make enough money as quickly as possible to stop doing the job and move onto something that speaks to passions and a happier lifestyle.

Whatever the gurus tell you, here are some recommendations:

  • Make sure, as much as you can, that you are paying market rates. Your best people may be very easy to poach by competitors if you are not. Review this issue regularly. 
  • Give workers an opportunity to buy into shares or other attractive stakes in the organisation.
  • Listen to, and watch, the little things that make a difference: free food, taxis after a certain time in the office, company-wide celebrations and parties.
  • Don’t be hypocritical about values that are not real, and honour promises made.
  • Where possible give people choice in how, when, where and with whom they work. Allow them to explore and exploit any talents that they have.
  • Do the HR stuff lightly. Remember nudging works better than fining.

Adrian Furnham is a professor at the Norwegian Business School

* r=: This is correlation coefficient, ranging from -1 to 1. It tells the size of a relationship between variables.