Debunking Performance-Related Pay for MBA CEOs


Data from the Corporate Governance Research Initiative at Stanford Graduate School of Business track the steep, relentless climb of average CEO annual compensation in the top 100 US companies. In the 80s, it was $1.8M, mostly in keeping with the trend for the past 45 years. In the 90s, however, it shot up to $4.1M, and at the turn of the millennium, to $9.2M, scaling new heights at $13.7M in 2014. The sky is indeed the limit for chief executive pay. Perhaps no one can claim greater responsibility for this phenomenon than Harvard Business School finance professor Michael Jensen. In line with Milton Friedman’s financial theory of the firm (its purpose is “to maximize shareholder value”) and his own agency theory (managers are “agents” of stockholders, who are “principals”), Jensen (and co-author Murphy) advocated tying CEO compensation to stock price performance through stock options and other equity-based pay. Thus CEO incentives align with those of stockholders, and agency problems such as shirking are avoided. Moreover, this way corporate management careers would attract “the best and the brightest”, for no doubt they prefer greater monetary rewards, not less, and they’d rather be paid for their performance, not independently of it. Further, performance-related pay could stop the flight of top talent to investment banking or consulting, encouraging them to seek jobs in the “real economy” instead.

In a recent article for Institutional Investor, Dan Rasmussen and Haonan Li tested Jensen’s almost intuitive claims relating MBA CEO pay to stock price performance and found no supportive empirical evidence. Stock options did not discourage MBAs from elite schools from working in investment banking and consulting. Even more worrying, elite MBA diplomas for CEOs were not correlated with market-beating stock price performance, nor was CEO performance measured in stock price consistent through a period of six years. In other words, the impact of CEOs on their companies’ stock prices was no greater than that of randomness. If Rasmussen and Li are right, then aren’t CEOs being grossly overpaid on the basis of a mistaken attribution?

Let’s have a look at their methods. Rasmussen and Li created a database of around 8500 CEOs, their tenure and education, with information on company stock returns. First they tested the predictive power of CEO characteristics on stock price performance. They found that CEOs with MBAs did not outperform those without them. It didn’t matter from which school they graduated. Neither did CEOs from banks and consultancies do better than the market average. “MBA programs simply do not produce CEOs who are better at running companies, if performance is measured by stock price return,” they reported. CEOs with MBAs from top schools are of course well-represented in corporate boards. But this only indicates that executive search firms have a clear preference for recruiting them, despite the lack of evidence for superior performance. It would be just another case of confirmation bias, when people tend to see a clustering of MBA CEOs in successful companies although there is no due cause.  

Next, Rasmussen and Li examined whether CEO performance was persistent through a six-year period, either in the same company or in successive companies. Again, surprisingly, they discovered it was not. At least, outcomes were no different from what we could expect to occur by mere chance. Companies, then, seem to be rewarding (or punishing) CEOs based on exogenous factors rather than their own performance or trajectory, measured in stock price behavior during their tenure. Similarly, this may be an example of the “hot-hand” fallacy, when we project a pattern from past results to the future without justification.

Absence of evidence is not evidence of absence. And we cannot really prove or demonstrate that CEO MBAs do not increase stock prices (all things being equal), because that is a null hypothesis. But the lack of correlation between CEO credentials and superior stock performance is certainly puzzling, were the contrary true.

What the research seems to imply, however, is that we cannot attribute company success in terms of stock price to the CEO, either exclusively or mainly. Management has always been a team effort. A just compensation policy has to take this principle more into account. Also, it may not be wise to focus on a single metric as stock price to gauge company performance, because this is far more complex. Doing so only creates an enormous temptation for CEOs and other members of the management team to be working for the wrong motives. And lastly, perhaps we should reconsider the usefulness of MBA programs to society at large, apart from boosting school and alumni incomes through networking. Originally, business schools were meant to help transform business into a profession, like law, medicine, or religion; now they are considered pricey leadership bootcamps. Do they really provide the right education for the kind of corporate and civic leaders we need?          



Should B-School Rankings Be Based On What You Earn or What You Learn?


Full disclosure. My first job was teaching ethics at a business school and it was horrible. I went from reading Plato’s Dialogues in Greek to what felt like taming lions in a circus ring during sessions which lasted all of 75 minutes. (That’s how I fell in love with research!) At that time, I couldn’t understand what the problem was: the topics? the methods? the class dynamics? Should I just study more? Were the students simply too smart for me? Only much later did I realize that while professors in other subjects taught students tricks on how to earn more, I did no such thing. On the contrary, I was perceived as the fun-spoiler, the one who kept on pulling the brakes. That doesn’t make you very popular when students are over a hundred thousand dollars in debt and have virtually put their lives on hold until they break even. Perhaps it was a motivational conflict, then, on why people went to business school. Was it to earn or to learn?

This clash of objectives lies at the heart of a new set of proposals for business school rankings. Authors David Pitt-Watson and Ellen Quigley of Cambridge University begin with a simple observation. Only two criteria, salaries and the opinions of alumni and recruiters, account for an average of 70% of the ranking scores by media companies such as BusinessWeek, Forbes, Financial Times, the Economist, and US News & World Report. This being business, returns on investment in the form of salaries and pre- and post-MBA differentials should indeed figure prominently. But is it all right to consider this the main business school deliverable? How much of it can be correctly attributed to the educational experience itself? As for the results of alumni and recruiter surveys, just how reliable and scientific are they? Wouldn’t alumni desire to inflate their own value or the ease of having a heuristic for recruiters exert undue influence?

Business school deans, we are told, are the first to criticize these ranking tables designed by self-styled education experts. However, they also acknowledge their outsized influence on students, companies, and society at large. Despite the self-fulfilling prophecy loops such reports generate, deans cannot afford to ignore them; any precipitous drop in rankings could make them lose their jobs. Hence, they have no choice but to govern schools sheepishly to the very rankings they detest.

Pitt-Watson and Quigley’s beef with the old rankings is that, besides salaries and reputations, hardly anything else matters. Not what programs teach, how well, and how much students actually learn which, presumably, come closer to what is expected from a school, even a business school. Nothing is said of the “sustainability development goals” —no poverty, zero hunger, good health and wellbeing, and so forth— espoused by the UN Global Compact (which promoted the study), or of the environmental, social, and governance concerns of the responsible investment firm (which provided generous research support). Certainly, not every business ought to have any of these aims as an immediate objective, but they do proffer a great deal of social legitimacy to the concentration of power and resources in corporations. To say the least, they remind us that businesses are not meant to be self-serving, but to serve families and society. They are not supposed to be mere legal inventions to line the pockets and boost the egos of a few. Of course businesses aren’t governments; their job is to produce wealth. But even then, businesses can and should take care that wealth is distributed equitably, according to need and merit. Besides increased earning capacity and social lustre, progress in ethics and attention to the environment should also count for a good business education.

The Cambridge authors agree there’s no such thing as a perfect business school ranking. They are equally aware of the difficulties in measuring the tacit knowledge and soft skills associated with ethics and sustainability. Yet they still manage to put forward some sensible recommendations. First, reduce the weight of salary differentials which encourage the funneling of graduates to jobs in finance and consulting, punishing those who opt to work in public service, NGOs, and not-for-profit sectors. They may earn less, but would arguably have a wider and more positive impact on society. Second, in hiring faculty and crafting programs, pay greater attention to social relevance and practical knowledge than to purportedly rigorous, but absurdly specialized and generally esoteric themes found in scholarly journals (“The Genesis and Metamorphosis of Novelty Imprints: How Business Model Innovation Emerges in Young Ventures”, for instance). The latter may burnish faculty and school credentials, but they don’t necessarily translate into more effective teaching and learning in the principled (we hope) art of business. Just take a look at the havoc wreaked in business practice by the uncritical repetition of the homo oeconomicus model, agency theory, and the financial theory of the firm. Regardless of what they say, the purpose of the firm should not be simply to maximize shareholder value. Nevertheless, the report also contains some insufficiently justified recommendations concerning diversity in the student body, faculty, governance structure, and so forth. Increasingly we’ve come to realize that obsession with diversity and identity politics creates intolerance and imposes uniformity of thought. Neither bodes well for creative and participatory business practice.

Ideally, people’s earnings should be a faithful reflection of their contribution to the productive effort of business, largely determined by their knowledge and skill in free market conditions. If that were the case, then perhaps salaries would be a good enough guide for school rankings. But we do not live in an ideal world. Too much emphasis on compensation in rankings produces an inversion of values, putting the means of earnings before the end of learning. Far from promoting the flourishing of business schools, students, and faculty, it breeds corruption. Further, top rankings are positional goods which are scarce, but only in a socially restrictive way. There cannot be more than one top-ranked business school for the same reason that not everyone in Lake Wobegon can be above average. No amount of time, money, and effort could produce more of such goods. So competition for them is mostly a waste of resources. And that doesn’t make sound business sense at all.    

The mark of Cain


Finding out the truth about someone else’s character often requires diligence, and saying it, courage, especially if it’s not pretty, and the other person’s more powerful than you. So, many are surprised we can still err by speaking the truth of other peoples’ failings. That’s called “detraction”, the “taking away” or diminishing of another’s good name or reputation. It need not be malicious, born of envy or a desire for revenge, for example; being petty, thoughtless, or careless is enough. Pity that, nowadays, detraction no longer raises moral red flags, just when the ubiquity of social media has made its practice a lot more pervasive.

The case for truth-telling is clear. Social life would be impossible without it. We simply could not act on the basis of what other people say. Instead, we would constantly have to verify things for ourselves: Did Jim remember to close the faucet and turn off the stove? Did Sheila fill the tank with gas and not diesel? Is the credit card you’re paying me with valid? Are the macchiato grande and red velvet muffin I ordered ready? Have you filled my prescription correctly? and so forth. Lying not only destroys trust and confidence, but also damages society. It could even provoke violence and revolutions, given the pent-up frustration of people who, by default, cannot help but expect to be told the truth.

To be a virtue, however, truthfulness needs to strike a balance between honesty and discretion. A truthful person hits the right mean between what ought to be expressed and what kept secret. There are several reasons why true knowledge should sometimes be kept in reserve. It may involve trade and industrial secrets, or privileged information we share with trusted professionals, such as doctors, lawyers, and priests. On occasions, it need not even have any economic value, or be embarrassing, or make us vulnerable in any way, such as the kindergarten we attended or our grandfather’s birthday. We just think there’s no need for other people to know about these bits of information, so we choose to keep them private.

Detraction distances itself from truthfulness in missing the just mean between honesty and discretion. The detractor speaks of another’s faults, mistakes, and errors to people who do not need to know, that is, without valid reason. Frequently, detraction is justified by a zeal for transparency: one thinks they have a right, even a duty to communicate —so long as it’s true— what satisfies another’s right to be informed. Detraction and morbid curiosity make a perfect pair. After all, truly honest people have nothing to hide, so be suspicious of anyone who behaved differently. And once you’ve discovered the rot (that would invariably be present), you’d do humanity a great service by unmasking the hypocrites and exposing them to the winds (or worse, to the jackals).

Detraction is especially grave because all human judgment and judicial systems are fallible. Credible accusations are not proofs of guilt and higher standards must be met for people to lose their presumption of innocence. Yet, once a person is publicly condemned, restitution becomes virtually impossible, even when the verdict is later reversed due to new evidence. Fame is a fragile glass which, once broken, can never again be pieced back together. That’s why it may indeed be preferable at times for the guilty to go scot free than for the innocent to be punished.

Social media are tools whose goodness depends on the purposes for which they are employed. For detraction, sadly, they are ideal, and it’s hard to imagine designing a more effective instrument. They offer one-click convenience at practically zero cost, allowing detractors to anonymously reach, depending on the platform, millions of users at once. That’s why governments and politicians are keen on influencing, and if possible, dominating or controlling social media platforms. But as we’ve come to realize, memes, posts, and tweets, despite factual content, can be totally misleading because they’re shorn of the contexts from which they derive relevance and meaning.

Detraction, which has found a great ally in social media, unjustly deprives individuals of the honor and respect to which they continue to have a right despite their failings. Human beings, thankfully, possess an irrevocable basic dignity, which even the worst punishments have to acknowledge. It would at least be equally criminal and dehumanizing to treat the guilty without pity or mercy, that is, inhumanely. Justice has to move beyond vengeance and retribution to healing and restoration. Instead of leading to despair, restorative justice includes a chance for the guilty to be remorseful, make amends, and eventually return to the fold. In short, it implies a path to forgiveness, redemption and reconciliation.

Detraction also causes scandal, which is a great lesion against the common good, especially when it refers to people invested with authority. Not that authorities should be granted impunity or given carte blanche, but prudence dictates that scandal —especially among the weak— always be considered. This refers to how their nefarious deeds are made known and how they are punished. Proceeding in this way does not put them above the law. Moreover, we have to find a way to safeguard the reputation of institutions these authorities have betrayed. They, too, are victims. It makes no sense to hand institutions the same sentence as the unfaithful representatives who abused their trust. Analogously, the abundance of corrupt politicians and officials does not give us license to forswear all government and become anarchists. That would be far worse than attempts at reform.

Above all, committing even the most heinous of crimes does not convert the guilty into fair game:

“And so, cursed shall you be by the soil that gaped with its mouth to take your brother’s blood from your hand. If you till the soil, it will no longer give you strength. A restless wanderer shall you be on the earth”. And Cain said to the Lord, “My punishment is too great to bear. Now that You have driven me this day from the soil I must hide from Your presence, I shall be a restless wanderer on the earth and whoever finds me will kill me.” And the Lord said to him, “Therefore whoever kills Cain shall suffer sevenfold vengeance.” And the Lord set a mark upon Cain so that whoever found him would not slay him. (Gen 4: 11-15)

We have a duty to tell the truth and to do so justly, calling evil by its name, no matter how ugly. But none of this dispenses us from living charity. Rather, we are always enjoined to think of our neighbor in the best lights. For small, inoffensive imperfections, it may be enough to make excuses for them. Perhaps they were in a hurry or have done so inadvertently, we may think. For more serious faults, we ought to admonish and correct them nobly, as we would a brother; privately, first, and publicly, only when expedient. And always, we have to reassure them that we continue to keep their interests at hand (heart?). For they are, in fact, our brother, and we are their keeper.   

Are Populists a Moral Political Alternative?

has-populism-in-politics-peakedI know I’m biting off more than I could chew. I could not in a single blog entry give a thorough and cogent response to the question I pose. That is not what I intend to do. But I believe there is value even in just raising the query. And if I am able, besides, to signal the more crucial issues, then we may all get closer to coming up with a thoughtful answer.

 First, a bit of context. Are populists a moral political alternative to whom? Above all, to the so-called globalist elites from traditional political parties who, til recently, have ruled established liberal democracies. Populist leaders have democratically risen to power in the wake of voters’ discontent with liberal democratic regimes not having delivered on their promises. So populism is largely viewed as the illiberal yet radically democratic and nativist remedy to problems liberal governments before them have proven incapable of resolving. Populists may endanger purportedly universal values such as the rule of law, the separation of powers, and civil liberties, but citizens have been willing to pay that price if they are guaranteed physical security and economic well-being in their homeland in exchange.

Flashback to 1989, when the world seemed closest to achieving the liberal democratic utopia. The Berlin Wall broke down, communism collapsed, and democracy and free markets reigned triumphant. What began around 300 years ago as a struggle against absolutist monarchs had culminated in popular sovereignty and the conquest, not only of political and civil liberties, but also, and increasingly, of social and economic rights for citizens of all nations. Of course, even for the majority of countries, there was still quite a distance to be covered; however, the path was already settled and clear. There was faith in that democratic processes and free markets together would unfailingly help societies move forward. They only had to stick to the Washington Consensus master-plan.

Then came 9-11, when passenger planes were used as bombs against the Twin Towers and the Pentagon, resulting in thousands of casualties. Afterwards came the horrific attacks perpetrated by Islamic fundamentalists in London, Madrid, Nairobi, and a host of other cities. Meanwhile, different wars in the Middle East, not only between Muslims and Christians, but also among different Muslim sects themselves likewise came to a full boil.

As if this weren’t bad enough, on the economic front, there was the Dot-Com bust at the turn of the millennium, and less than a decade later, the Great Recession that almost triggered a global financial meltdown. It was right at this moment when charismatic populist candidates first, and parties that coalesced around their personalities afterwards, began conquering political ground.

To be sure, macroeconomic data were already indicating a recovery. The US, for instance, embarked on what has become the longest period of continuous growth, and quarter upon quarter, unemployment figures just kept on falling. Although not as robust, the same optimistic tendency could also be found among the EU and Asian economies. Moreover, the much feared specter of inflation was nowhere in sight. Nonetheless, for the great majority of individuals, it certainly didn’t feel that way. Economic growth seemed to have benefitted only the extremely wealthy, whereas the middle class saw their salaries stagnate or worse, their purchasing power erode. Inequality then became everyone’s favorite whipping-boy.

Further, people just didn’t feel safe commuting to work, dining out, visiting tourist spots, or even exploring Christmas markets. Any time, at the shout of “Allahu akbar!”, suicide bombers can detonate their vests, rogue drivers ram vehicles through crowds, and knife-wielding madmen hack their way through a thicket of pedestrians. All Muslims are now viewed as Islamic fundamentalists. These, in turn, are conflated with all Arabs, and lastly, with all migrants, foreigners, or whoever look different.

Populists build their platform on providing safety and taking care of their own citizens first. What could be wrong with that? So voters, driven by anger and fear, bought into these promises head on. Never mind if it meant leaving boatloads of refugees stranded at sea and lifeless bodies of toddlers washed ashore. Never mind if children of asylum-seekers are separated from parents and detained in cages. Never mind if hundreds are murdered by government forces in an all-out war on drugs. They’re all just unfortunate collateral damage, sacrificed to a future greater good. If that is the price of social order and economic security, so be it.

But as in all things human, we must consider not only the what, but also the how; along with the objectives, the methods. Dignity requires that we acknowledge and safeguard the inviolable, intrinsic value of each human being, regardless of the situation or consequences. All human beings deserve respect as “ends in themselves”, never to be used simply as means or instruments to another’s ulterior motives, however noble these may appear. The same holds when choosing politicians as well.

So next time you cast your vote for populists, just to get the job done, without worrying over the how, consider the following: you may have unknowingly added a hit-man on your payroll. Now, what does that make of you? Who have you become? Politicians cannot be mere thugs for hire to do our dirty work. We may be content at first, for they seem effective and unscrupulously deliver the goods. But because they lack a moral conscience, it won’t take long til they turn against us. Beware.                       


The Parenting App: “We need to talk.”



The ideal ride on the Metro is like entering, zombie-mode, into a time warp with your own personal pod. Put your shades on despite the dim, back-lit tunnels, the better to catch up on sleep or to stare at others without being stared at in return. Be ready with head-phones or ear buds to listen to your own music instead of the bland safety and station announcements which are often unintelligible. Some immerse themselves in their e-readers or play games and even watch movies on their phones. Others do crosswords and sudokus on the free subway papers. Eating and drinking may be prohibited, but many sip coffee from cups and mugs anyway. Do whatever it takes to isolate yourself while travelling on the rickety, smelly, and jam-packed train.

Until Tenleytown station, when a mother comes in with her toddler on a stroller. I imagine she’s on her way to work, but first, she has to drop him off at daycare.

She occupies one of the reserved seats. Hardly has the train left the station when she pulls out a picture book from her bag. She shows it to her toddler and, surprised, he claps and chortles with glee. Today’s lesson is about animals in the zoo. She reads: “Giraffes are tall and have long necks. Zebras are like horses with stripes. Turtles walk slowly and hide in their shells. Bears are huge and furry…” His eyes open wide, so does his mouth, as he tries to take in every word she speaks.

Little by little, the passengers around them turn away from whatever it was they were doing and focus, mesmerized, by what’s going on between mother and child. The pair, however, seems completely oblivious of their surroundings.

Such a scene of intense humanity is a rare comfort as one travels amidst a sea of indifference on the Metro.

But soon we reach DuPont Circle and the mother and child get off.

At Rhode Island station, however, a few stops down, another mother, with child in tow, enter the same carriage. She has earphones on and drags her child by the sleeve to an empty seat. He’s crying and she’s yelling at him to stop, hitting him on the head because he doesn’t listen. He cries even louder.

Much as you would like to mind your own business, it’s hard not to notice. The boy must have done something wrong, surely, and his mother’s right in reprimanding him. She’s just doing her duty. But he doesn’t understand and she offers no explanations. Only more shouts and sharp tugs at his clothes. Angry and frustrated, he continues to ask. But with her ear-phones on, she tries her best not to listen. They’re on the train and it’s embarrassing. He has to learn to keep still and quiet and hold back his tears.

I get off at Brookland and can’t help  but reflect on the contrasting parenting styles I’ve just observed. Humans come with a built-in parenting app called language, and with a bit of empathy, it could work wonders, transforming children from barely to fully-linguistic creatures, equipped with a moral sense. But first we’ll have to pull the plugs from our ears, the blinders from our eyes, and the locks from our hearts:

Imagine a toddler runs, trips, and scrapes his knee. That stings and he cries. He can’t figure out the pain, but only feels the hurt. Until his mother comes and asks, “What happened? What did you do?  So you were running and you fell down?”

He nods his head.

“And you hit the sharp edge of the rock and wounded your knee?”

He assents again.

“Now it couldn’t hurt that bad”, she says, as she wipes the knee and blows the wound a  kiss. “Besides, I’ve got a brave little boy who’s now going to stop crying.”

And so he does, stifling his sobs to please his mother.

Language is, by far, the best parenting app. Talking to kids, explaining life’s events, helps them go beyond their immediate experiences of pain and pleasure, and achieve a necessary cognitive distance. Not only do they learn the names of things and acquire an understanding of causes and effects, but they also develop a knowledge of what’s moral, of the appropriate initiatives and reactions to their surroundings.

We all have to learn to use this app more often and better.