Pay cuts for chief executives are rare and are almost never about performance, according to a new survey, which may help change the view of executive pay.

The survey also finds a majority of directors say that shareholder “guidelines” have caused them to offer lower pay than they otherwise would have and led to an “inferior” structure to a CEO pay offer.

A survey from London Business School looks at the drivers of CEO pay deals and finds that 77% of the directors surveyed have never implemented a pay cut.

Meanwhile, 77% of directors say constraints such as shareholder guidelines have caused them to offer a “lower level of pay”, while 72% say these constraints have resulted in a pay deal with a less than optimal structure.

Conducted by Alex Edmans, Tom Gosling and Dirk Jenter of London Business School, the pay survey finds that, while “good performance justifies pay increases, they [directors] do not believe poor performance justifies decreases”.

The survey comes at a key moment in UK business. While the public narrative over the past few years has focused on reducing executive remuneration, the City and—in particular—the London Stock Exchange have attempted to renew debate about pay levels as a factor in making the UK more competitive.

Interviewees explained to the researchers that a pay cut would “demotivate the CEO” and if performance were really poor, CEOs would be fired instead.

They add that directors reveal investor support is the “strongest constraint” on arrangements.

The real deals

The findings help paint a more complex picture of CEO pay than has perhaps been revealed by other studies. The trio conclude: “Our results show that many standard assumptions of executive pay models do not describe how pay is actually set and they suggest alternatives that bring the models closer to reality.”

The survey asked directors who had cut pay under pressure from shareholders to explain the impact. In 7% of cases, the CEO hired left; 13% said that they simply hired a “less expensive CEO”. But a weighty 41% said there were “no adverse effects”. “This result,” the research team writes, “is meaningful, since any self-serving bias would discourage this response. Thus, at least in some cases, boards underestimated their latitude to cut pay.”

That said, 42% of directors report that the “CEO was less motivated, suggesting that the level of pay affects incentives, in contrast to standard theories”.

Chief among the discoveries is that “keeping pay levels down” is actually a low priority, with only 1% of non-executives and 5% of investors saying it was a “primary goal”. This runs against the general public commentary on pay.

However, non-execs and shareholders are split on what they are trying to achieve. Of non-execs, 65% say attracting the “right” CEO is “most critical”; meanwhile, 34% say their priority is a pay structure that “motivates” the CEO.

For investors, the priorities are reversed: 51% favour motivation while 44% think finding the right CEO is the most important factor in pay deals.

However, non-executives and investors may be closer on the subject of financial incentives and how they motivate CEOs. Both, the team point out, believe they are important but “secondary” in a pay deal.

“The CEO’s intrinsic motivation and personal reputation are seen as most important, yet are absent from nearly all theories [of executive pay].”

The results suggest incentive pay may work through “different channels”: most CEOs see it not as adding to their wealth but as “fair to be recognised for a job well done”.

Pay will always be a consideration but it important to understand the issues and what drives pay levels. Edmans, Gosling and Jenter give some important insights.