Friday, March 07, 2014

Big Company CEOs Just Aren't Worth What We Pay Them - Forbes

Hmm.. this is from Forbes! A good piece...

Big Company CEOs Just Aren't Worth What We Pay Them - 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 underperform in
comparison to those of their less publicity hungry peers. Perhaps
because the latter spend their time running their businesses well

So far, so good. I’d never quite got the fact that a CEO might be
worth several hundred times the average person working for them (around
380 times, according to estimates from the AFL-CIO as recently as 2012.)
But what do we do about it?

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
organisation, 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.”

As the old Bob Dylan lyric goes, “Don’t follow leaders.” And if
Messrs Armstrong and Jacquart are right, don’t pay them quite so much

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