Deferred Pay in Financial Services: Compliance, Productivity and Attracting Talent

Abstract

Behavior that violates company policies and/or societal notions of ethical conduct can sometimes produce short-term profits and consequent bonuses. Due to imperfect monitoring, such behavior may not be identified until after bonuses have been awarded and paid. Deferred remuneration with malus provisions has been proposed as a possible antidote to misconduct in the financial services industry. The principal attraction of deferred remuneration is the potential for better monitoring of behavior and outcomes prior to the payment of any variable remuneration. This paper is the first to empirically examine the impact of deferred remuneration on both compliance and productive behavior. We also consider how this change might affect the ability of the industry to attract talent through investigation of self-selection effects. With 298 student participants, we first use experimental methods to examine the case where a change in remuneration is imposed. We observe an increase in strategic violations of policy when deferred payment of variable remuneration is imposed, and mixed results for compliance behavior depending on how it is measured. Allowing for self-selection effects, where individuals can choose their preferred payment structure, the benefits of deferrals become more apparent. Relative to the case of immediate payment, deferred payment of variable remunerations improves compliance on all our measures. For example, the proportion of participants with zero policy violations is 23.2% higher and we also observe a statistically significant increase in productivity. We show that more productive individuals are attracted to the condition with deferred payment and superior monitoring, while less compliant individuals are attracted to the condition with immediate payment and poor monitoring. Finally, we observed that male participants in our experiment are more likely than females to select the condition with immediate payment and poor monitoring. The study suggests that the short-term impact of a switch to deferred remuneration would be limited. Over the long-term, allowing for self-selection effects to occur, adoption of deferred remuneration is likely to produce improved conduct, higher productivity and a greater proportion of females in the workforce, relative to workplaces retaining immediate payment of variable remuneration. A switch to fixed remuneration, with neither sanctions nor benefit flowing from policy violations, would not be beneficial for employee behavior. After allowing for self-selection effects, this study confirms that productivity decreases under fixed remuneration and suggests that there would be no compliance benefits.