I have been writing about the problems of overpaid executives that has lately become so bad that “overpaid executives” doesn’t capture the nature of the problem. Today I see many CEO’s are acting as kleptocrats do – taking food out of others mouths to build their castles. The damage done to everyone else involved is of no concern. Both groups love bankers that flood them with cash for new and larger castles at the expense of the futures of their company (or country).

This paper does a very good job of providing more evidence of the damage done by these kleptocrat CEOs and their apologists.

Are Top Executives Paid Enough? An Evidence-Based Review by Philippe Jacquart and J. Scott Armstrong

Our review of the evidence found that the notion that higher pay leads to the selection of better executives is undermined by the prevalence of poor recruiting methods. Moreover, higher pay fails to promote better performance. Instead, it undermines the intrinsic motivation of executives, inhibits their learning, leads them to ignore other stakeholders, and discourages them from considering the long-term effects of their decisions on stakeholders. Relating incentive payments to executives’ actions in an effective manner is not possible. Incentives also encourage unethical behaviour. Organizations would benefit from using validated methods to hire top executives, reducing compensation, eliminating incentive plans, and strengthening stockholder governance related to the hiring and compensation of executives.

Many of the problems with the poor thinking around executive pay stem from the failure to grasp ideas Dr. Deming wrote about decades ago.

Executives are often evaluated on the basis of the success or failure of the business units for which they are responsible. In practice, many internal and external factors influence outcomes for firms, and assessing the role played by a given executive is not possible. For example, should a manager get credit for a firm’s success when the economy is booming or blame for the firm’s losses during a recession? When answering such questions, evaluators are biased toward ignoring contextual factors and overly attributing outcomes to leaders. This bias was illustrated in a laboratory experiment in which groups of participants had to solve a coordination task. In the experiment, group size varied, and participants could perceive that the task was harder when the group was larger. Despite this, participants credited group leaders for the success of small groups and blamed them for the failure of large groups (Weber et al. 2001).

The quote from their paper show a failure to understand variation (attributing variation to those near the variation at the time – good marks when the variation is good, bad marks when it is bad). And a failure to understand the organization as a system (the results of any subsystem are greatly influenced by the whole system and the conditions outside the system (the economy, the macro-economic conditions for the industry…). And a failure to understand the theory of knowledge: people should know our brains leap to causation explanations when the evidence doesn’t support it. Then confirmation bias and psychology lead us to accept the data that supports our biases.

Nonexperimental studies also find that increases in CEO compensation occur following increases in firm performance that result from factors beyond the CEO’s control—CEOs are paid for being lucky. For example, CEOs in the oil industry were compensated for increased profits resulting from fluctuations in the price of crude oil—a factor beyond their control (Bertrand and Mullainathan 2001).

You see this just looking at the money heaped onto executives (in addition to the already huge payments taken) in industries whenever those industries (not individual companies, the entire industry) have macro-economic windfalls.

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