CEOs Matter
The Atlantic has an article in its current edition that (kind of) argues that CEOs don’t matter as much to corporate performance as is believed by most interested parties. The argument that is presented against CEOs is really an argument against markets setting prices, and in favor of using academic analysis to do this. It is one small tile in a huge mosaic of intellectual opinion that is running against economic freedom.
I’m pretty unconvinced by the evidence it presents, and have a rebuttal up at Atlantic Business.
I know this is going to sound like a bunch of science appreciation claptrap (“I had this really cool course when I was a freshman in the honors program…) but mightn’t CEO performs be best understand as a sort of macro quantum/wave phenomenon? Any given CEO might be a jerk, or have a brain tumor making him do weird stuff, or be beset by genuinely unforeseeable circumstances, but in the aggregate the quality of their leadership/business skills matters a lot.
My own simple experience that seems obliquely relevant to CEO compensation is that while it’s not uncommon to find tools that are overpriced, it’s considerably less common to find tools that are underpriced.
— Tony Comstock · Jun 5, 05:39 PM · #
How about cross-cultural comparison? As I understand it, European CEOs make much less than their American counterparts. Are they so altruistic that they’re willing to take one-fifth of what they’re worth? Is it collusion on the part of the boards of directors to keep salaries down? Something else?
It seems to me that the European pay scales are better than the American pay scales for society as a whole. Do you disagree? Could we get from here to there, and if so, how?
— dj · Jun 5, 05:40 PM · #
Four questions/points. First, why do you say the piece is an argument for using academic analysis to set prices, not markets? I didn’t detect that in reading the article, but perhaps I wasn’t paying adequate attention. An argument that CEOs don’t make much difference could coincide with the view that the only (or best) solution is for boards to read up on their academic studies of CEO impact.
Second, I’m broadly sympathetic to your critique—the theoretical obstacles to measuring CEO performance seem daunting, and the Atlantic article often has a tone of “it has been shown that…” followed by implausibly specific claims.
Third, that said, I’d think that attention to the fundamental attribution error, and other elements of social psychology would militate towards thinking that we tend to overestimate the import of CEOs, and others in the public eye.
Fourth, it strikes me that even more interesting than the question of how much of a difference CEOs make is the question of how accurately we can assess and predict CEO performance (which should logically lag the difference that the CEO makes).
— Justin · Jun 6, 04:27 AM · #
Justin:
The reason I say that is because the more humble we are about our ability to measure something realiably that is economically important, the more it is rational to rely on markets to do this rather than analyses.
— Jim Manzi · Jun 6, 09:30 PM · #
Jim- Mike Rorty has what I take to be a pretty devastating rebuttal of your rebuttal. Do CEO’s get lavishly rewarded for luck? He links to a paper that argues that they do, (Oil Execs get more money when oil prices go up, Tradable CEO’s get more when forex markets move their way). Critically, they don’t get punished for bad luck.
This points to insider skimming as the main determinant of CEO pay. Trusting an insider fixed ‘market’ for something economically important seems naive, in these days especially.
(Link to Rorty in my pseudonym)
— OGT · Jun 9, 02:14 AM · #