Are Top Executives Paid Enough? An Evidence-Based Review

Philippe Jacquart, EM Lyon Business School
J. Scott Armstrong, University of Pennsylvania

Document Type Working Paper

Jacquart, P. & Armstrong, J. S. (2012). Are Top Executives Paid Enough? An Evidence-Based Review. (Working Paper Version 137).

Abstract

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. High pay undermines executives’ intrinsic motivation, inhibits their learning, leads them to ignore other stakeholders, and discourages them from considering the long-term effects of their decisions on stakeholders. In particular, it is not possible to relate incentive payments to executives’ actions in an effective manner. Incentives also encourage unethical behaviour. Organizations would benefit from using validated methods for hiring top executives, reducing compensation, eliminating incentive schemes, and strengthening stockholder governance.