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Consultants don't want to know this, but all the research seems to prove pretty substantially that REALLY high pay messes up the minds of the eligibles. Elliott Jacques first noted it, Bud Crystal has issued an annual report about it for decades and Dan Ariely's research confirms it, too.

It appears that the ratchet effect is promoted for self-serving reasons that are based on assumptions about received wisdom rather than empirical proofs verified by real-world observation. Certainly, no one regularly sees operating results generated to a statistically significant degree compatible with the level of executive pay. Those paid the most very freqently preside over firms with rather lackluster performance.

I'd love to see analyses showing otherwise.

Hi Jim,

I have also seen that research. In a prior post (http://www.compensationcafe.com/2013/03/is-disclosure-good-or-bad-for-executive-compensation.html) I wrote about the fact that high pay is as much about "respect" as it is compensation.
Whether this makes sense to the rest of us, many CEOs believe that they are better than most, if not all of their peers. This means that they should receive a higher "score". Since the scorecard at that level is pay, and everyone knows what everyone else makes, this drives pay upward, regardless of performance.

But, that it a topic for another day. Let's throw out the high-end outliers for a moment and talk about the other 90-95% of executives. There are reasonable arguments that pay drives performance. There are reasonable arguments that performance begets higher pay.


(please excuse any typos, did this on my iphone)

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