Are Marketing Executives Overpaid?

Introduction

Scott Armstrong presents evidence that higher pay does not lead to better management

Do you get what you pay for when hiring executives?

In 2011, J.C.Penney hired a new CEO, Ron Johnson—a former successful Apple marketing executive. The company paid top dollar to get Johnson. Johnson then hired expensive people to replace the top executives at Penney. Shortly after that the company faced financial struggles and rapid decline. What went wrong? There are many explanations of possible causes, but here is another one: The assumption that high remuneration will enable firms to get the best talent.

Because the problem is complex, one must rely on experiments rather than expert opinions. Thus, to examine this question, Philippe Jacquart of EMLYON Business School and I reviewed findings from experimental studies. This is the first published review of the experimental evidence on the issue of executive pay. Many experimental studies have been done. We were surprised by the consistency of the findings.

Here are the basic findings:

  1. The notion that higher pay leads to the selection of better executives is undermined by the prevalence of poor recruiting methods.
  2. Higher pay fails to deliver 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.
  3. It is impossible to relate incentive payments for executives’ to the performance of the firm. Organizational incentive systems only work when the employee has full control over outcomes as when production workers are paid piece rates
  4. Incentives encourage unethical behavior.

See Jacquart, P. & Armstrong, J. S. (2013), “Are Top Executives Paid Enough? An Evidence-Based Review,” Interfaces, 43, pp. 580-589, followed by commentaries by leading scholars on this topic. The papers are available here.

-J. Scott Armstrong
Wharton School, JMHH 747
U. of Pennsylvania, Phila., PA 19104
Home Phone 610-622-6480
armstrong@wharton.upenn.edu
http://adprin.com
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homepage:http//jscottarmstrong.com