Business Exposed118
Joe, Jim, and Tim concluded, “boards selectively dene peers in
self-protective ways”.
Which simply means that they dupe us to pay the buggers too
much.
CEOs do seek advice – if you pay them for it . . .
So, now we know that stock options alter top managers’ behavior
(in the form of risk-taking), but what about performance-related
pay in general? Does this alter behavior in other ways too? And
does it actually improve it?
I know I previously said that I nd it a bit strange that top
managers would need performance-related pay. Do you really
want someone at the helm of your company if he only works
hard and smart if he’s directly rewarded for it? On the other
hand, I have to admit, no matter how rhetorical this question is
intended, I guess it is only human nature . . .
It is human that our behavior alters due to performance-related
pay; and you and I are probably no exception. The trick then,
of course, is to get the right measurement system, and perhaps
not to overdo it; too much performance-related pay may alter
the behavior of top executives in ways you had not got in mind
when putting the measures in place! We’ve seen ample examples
of that over recent years . . . Enron, Lehmann, and Worldcom
come to mind.
So, how might it bias top executives’ behavior in useful ways?
Professors Michael McDonald from the University of Central
Florida, Poonam Khanna from Arizona State University, and
Jim Westphal from the University of Michigan examined an
intriguing aspect of CEO behavior, and that is their inclination
to seek advice from others.
CEOs often seek advice on strategic issues from executives of
other rms. However, we also know from research that, just like
the rest of us, they are often inclined to solicit that “advice” from
friends and other people who are just like them. In such cases,
1195
n
Liaisons and intrigues
it is not really genuine advice-
seeking, but it serves more in a
self-conrmatory fashion; people
seek conrmation that what they
are doing is right, and what better
way to get that than by asking
the opinion of your friends?
To examine which CEOs engage in this pseudo advice-seeking
and which ones truly turn to people who might actually disagree
with them, McDonald and his colleagues surveyed 225 large
American industrial and service rms. They managed to obtain
information on how often their CEOs sought the input of other
top managers outside their own rm, and how well acquainted
they were to them. Subsequently, they statistically correlated that
to the extent to which these top managers received performance-
contingent compensation packages, and found a very clear result.
Those CEOs who had a very small performance-related pay
component in their compensation package sought very little true
external advice. They relied on asking their friends – and perhaps
their wife, uncles, and mother – whether they too thought that
what they were doing was great, splendid, and spot on.
In contrast, CEOs with a relatively large performance-contingent
component in their remuneration package sought advice much
more often from other executives who were not their friends
and who had different backgrounds than themselves. These
people may be slightly scary (they might actually tell you
that what you’re saying is nonsense!) but perhaps also more
useful. Moreover, McDonald and colleagues showed that this true
advice-seeking signicantly helped the nancial performance
of the CEOs’ companies, in the form of an increase in the
company’s market-to-book and return on assets. Thus, the scary
stuff actually led to hard cash!
The pay-for-performance construction paid off; it stimulated
executives to repress their “it’s-only-human” inclination to avoid
asking the opinion of people who might actually disagree with
you. It is much safer and less threatening to solicit advice from
‘‘
People seek confirmation
that what they are doing is
right, and what better way to
get that than by asking the
opinion of your friends?
’’
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