The Ombudsman: Are Top Executives Paid Enough? An Evidence-Based Review

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. 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 behavior. 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. 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,

The influence of CEO compensation on employee engagement

“…First, as suggested in the business world, employees may benefit from higher CEO compensation if such higher pay leads to attracting better CEOs and incentivizing CEOs to perform at higher levels, thereby improving firm performance. However, evidence on the impact of CEO pay on firm performance is inconclusive (Frydman and Jenter 2010;Jacquart and Armstrong 2013;Haynes et al 2017) and there is little evidence that firm performance improves employee well-being (Krekel et al 2019).…”