Top economists don't think large executive salaries reflect current contributions to firm performance

Executive compensation has less to do with current contribution to firm performance and more to do with efforts to move up the corporate ladder.

The Initiative on Global Markets at the Chicago Booth School of Business conducts a number of polls with a panel of top prominent economists, including a good number of Nobel Prize winners like Richard Thaler, Angus Deaton, and Oliver Hart.

Their latest poll posed an interesting question:

"Are large salaries for senior business executives less a reflection of an individual’s current contribution to a firm’s overall performance than a ‘prize’ for those who put in the effort to achieve one of the top positions?"

Panelists responded on an agree/disagree scale, but also had the option to indicate they're uncertain or have no opinion on the matter.  Here's a summary of how the respondents (79 in total) answered the question:

source: IGM Economic Experts Panel, December 8, 2020 (combined US and European panel responses; excludes non-respondents)

The upshot: a near majority of economists in the panel agree with the idea that executive compensation has less to do with their current contribution to firm performance and more to do with their efforts to move up the corporate ladder.  

The idea of "promotion tournaments" as a way to motivate effort in a hierarchical organization was developed by Ed Lazear and Shewrin Rosen.  The basic concept is simple: by creating significant pay differentials between levels, you get people to exert more effort in order to move up to the next level.

The question then is, how much of the effort to get promoted truly productive?  Some prominent panelists were skeptical:

If you've read our book, then you won't be surprised to know we share this skepticism.  In a pyramidal organization (aka bureaucracy), megawatts of emotional energy get wasted on petty battles, data gets weaponized against adversaries, collegiality gets shredded by zero-sum promotion tournaments, and decisions get corrupted by artfully concealed self-interest.

Bureaucracy doesn’t bring out the best in people, nor does it reliably get the best people to the top. Post-bureaucratic orgs like Haier, Gore, Buurzorg, Morning Star, and others work hard on creating systems where everyone's comp reflects contribution, not rank.

They understand that the energies of every employee are better invested in building a better business rather than winning a promotion tournament.