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Sky’s the limit

GB Geo-Blog

Sky’s the limit

Let’s start a game with nine people and we give the first person selected the number one, the second person the number two, and so on until the last person selected gets the number nine. Everyone ends up with a number between one and nine. The average number for these nine people is five. Now we hire a consultant who concludes that no one should have a number less than the average, and recommends that the four people with the the numbers one to four should add five to their respective numbers. We follow this advice because the consultant is an expert, and we end up with one person with the number five, and two persons each with the numbers six, seven, eight and nine. The new average is 7.2. However, we now have five people with numbers below the average. What do we do?

Our consultant tells us to add five to each of the numbers assigned to those unfortunate five people who currently have numbers of seven or less. Sounds like a good idea. By now you should see where this going. Everyone’s number will continually increase, as will the average. Regardless, there will always be some people below the average. That’s a key characteristic of a statistical distribution. There is no end to this game, unless, of course, everyone is given the same number. But the people are not the same, and so they do not deserve to have the same number. Some are better than others according to our consultant.

Welcome to the world of executive compensation and compensation consultants. In this world, the consultants recommend to each client that the CEO should be paid in the top 20% of the distribution, and the comparator groups are chosen to dramatically increase the range of compensation. The end results are similar to the simple game I just described since every CEO cannot be in the top 20%. Directors love this game, especially if they happen to be CEOs of other companies. No director will ever recommend placing her/his CEO’s compensation in the bottom half of the distribution. Isn’t this akin to admitting that you are not hiring the best? And every director only wants to hire the best because this is what is expected by the shareholders, whoever they might be on any particular day.

The events of the past 15 months have clearly demonstrated to everyone who has not had his head buried in the sand that there are very, very few super star CEOs. Most are barely competent. So why are we lavishing great riches on mediocrity? Because this is how this game is played!


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