Deferred Variable Remuneration - A Solution for the Financial Services Industry?

Abstract

This experimental study investigates how the use of deferred variable remuneration, as opposed to immediate payment of variable remuneration and fixed payment, would affect both misconduct and productivity. Unsurprisingly, the study finds lower rates of misconduct under deferred variable remuneration versus immediate variable remuneration. Those who select Variable/Deferred display significantly better compliance with policy than those who select Variable/Immediate.

We take account of the possibility that changes in remuneration might influence the ability to attract talented graduates and retain talented employees. We confirm that fixed remuneration tends to repel talented individuals, and that this remuneration structure has the worst productivity outcomes. While some individuals prefer variable remuneration with immediate payment, these individuals are not significantly more likely to be talented. In fact, greater talent was associated with the choice of variable remuneration with deferred payment. Our results are consistent with previous behavioural research which has found that cognitive ability is associated with greater patience and therefore lower discounting of future payments. Consequently the use of deferrals may be beneficial for attracting/retaining talented individuals and maintaining high levels of productivity.

Keywords: deferred pay, self selection, experiment, compliance, productivity

JEL Classification: C90, J33, M52