The Oakland Athletics, featured in Moneyball, used Meehl’s rule to great effect, but few businesses have done the same, Jacquart and Armstrong point out. This is unfortunate, they add, because they expect that using the rule would help all involved. “There is room for improvement – quite a bit of room, in fact,” Jacquart notes.
When judging compensation for those who are offered the job, Jacquart and Armstrong say there is no evidence that the top dollar gets, or retains, the best talent. The authors point to an analysis that shows a positive relationship between financial rewards and simple, perhaps boring, tasks like installing automobile windows. For interesting or difficult tasks, however, financial incentives did not produce better results.
The authors cite a study showing that CEOs who won awards in the press saw a marked increase in pay, while similar CEOs (runners-up for the awards) saw little increase. Three years later, there was a large gulf between what the winners and non-winners earned. However, the stocks of the firms controlled by the ‘superstars’ actually underperformed compared to those of the firms run by the non-winners.
Executives, they write, are often held personally responsible for the success or failure of the organisations they represent without consideration of external factors, such as the state of the economy. They point to a study in which CEOs of oil companies that performed strongly were compensated well, despite evidence that the profits resulted from fluctuations in the price of crude oil.
Businesses often look outside an organisation to choose their leadership, trying to find people who have enjoyed success elsewhere, with the theory that they can replicate that success in their own organisation, the researchers note.
However, boards often give short shrift to internal candidates who tend to have better knowledge of the job, company culture and product. The authors cite a study of an investment banking division, which compared the performance of internal hires against external ones who were compensated more. The study showed the external hires performed worse and left the company sooner than those chosen from within.
Small companies tend to promote from within, and Apple, Armstrong and Jacquart note, lost its way when it hired outsiders as CEOs after the ouster of Steve Jobs in 1985. Given the importance and status that comes with being CEO, many capable individuals would accept a modest salary, they write, praising the Mondragon cooperatives in Spain where the CEO makes less than 11 times the lowest-paid employee and works at the pleasure of the employee-owners.
“When it comes to executive selection and remuneration, a stark contrast exists between experimental findings and current practice,” they note.
Another field experiment had participants completing tasks that required creativity, attention, concentration and memory. Some were told exceptional performance would get them a small financial bonus, others were told they would get a medium-sized reward, and a third group was offered a large one.
The performance of the small- and medium-bonus groups was roughly similar, while the large-bonus group actually did worse. Researchers in this experiment performed brain scans on participants and found that in the large-bonus group, the matter of the reward took up so much of their thought that there was little room for anything else.
Armstrong says many executives would respond to the free-market bidding process. Small executive search firms, he adds, could be formed to supply “evidence-based” search procedures. Or better yet, companies could do their own searches. “In addition to obtaining better selections,” Armstrong notes, “they would save money on the search and on executive salaries.”
