Overall, CEOs don’t earn their big paychecks

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The following is by Mark Symonds for Forbes

It isn’t every day that academic research comes along to tell you something you really wanted to hear and that you suspected was the truth all along.  In this case it’s about the long running debate around top executive pay.

A recent paper by J. Scott Armstrong of the Wharton School and Philippe Jacquart of France’s EMLYON, seem to have finally established that paying top dollar simply doesn’t get a better job done.  And, in fact, it might actually get a worse one done.

According to Armstrong and Jacquard, while there is plenty of evidence that financial incentives can be effective in motivating people to do mundane and boring tasks, individuals do the more interesting and challenging stuff…well, because it’s interesting and challenging.

Perversely, they say, very large financial incentives may actually hinder top performance. The paper argues there is strong evidence that individuals can become fixated on incentives and either become limited in their thinking, unable to digest and adopt new ideas or alternately become convinced that they will achieve the goal automatically so do not need to try as hard as they might otherwise.  Whatever the outcome, every other stakeholder from the more modestly earning employee to the corporate stockholder loses out.

And finally the research also suggests that we might not really be getting the brightest and best talent at the top because the tools and processes used to identify candidates are either limited or downright faulty

There is simply too much emphasis on past performance, personal recommendation, unstructured interviewing, an unwillingness to ask really difficult and searching questions and that more dangerous selection criterion of all – gut instinct. Worryingly, it seems that the headhunters and in-house recruiters charged with hiring occupants of the corner office may be relying too much on perception and too little on good, hard facts.

The paper points out that CEOs who win prestigious industry awards constantly out-earn those that don’t.  Yet the stocks of the companies the award winners head up consistently under-perform in comparison to those of their less publicity hungry peers.  Perhaps because the latter spend their time running their businesses well instead.  [snip]

Unlike many academics, who might shy away from coming up with a solution, EM Lyon’s Jacquart is one willing to give the obvious if uncomfortable answer – namely that current incentive models need to be abandoned and overall executive pay should be reduced.

And he’s also ready with a counter to those who will doubtless argue that this will make it impossible to recruit the right people and bring major banks and corporations crashing to the ground.

“Yes, of course this may make it more difficult to recruit very senior individuals from outside an organization, at least in the short term. However it would force businesses to focus more on the development of the talent it already has, the talent that is more likely to be more loyal to and understanding of its aims, goals and methodologies.”
[snip]

via Big Company CEOs Just Aren’t Worth What We Pay Them.

Here’s a link to the source of the chart, an article that compares trends in CEO pay, minimum wage and the pay of average workers to growth in U.S. productivity.

http://www.huffingtonpost.com/2013/12/27/2014-minimum-wage_n_4501830.html

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5 Responses to “Overall, CEOs don’t earn their big paychecks”

  1. Notes To Ponder Says:

    My husband deals professionally with insurance companies. One in particular represents the lion’s share of billings he issues. A few years ago the insurance company stopped paying invoices submitted by lawyers acting on their behalf – this happened without warning a few months before year end. This is a large company whose mega six figure CEO stood to gain a massive “bonus” if expenditures at year end were kept below a certain figure. Solution – simply stop “insuring” and paying bills until his bonus was in the bank. Ultimately he lost his job, was paid a massive undisclosed severance, laughing all the way to the bank.

    Like

  2. whungerford Says:

    Production workers want their wages to reflect productivity gains–it makes sense for workers who produce more to be paid more. But the link between CEO pay and worker productivity is tenuous. CEO pay might better be linked to potential for long-term sales and profits.

    Like

  3. philebersole Says:

    The Armstrong & Jacquart study, quoted in the Forbes article, asserts that exorbitant CEO pay does not produce superior results for stockholders, but rather the reverse.

    Like

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