Inside the head of an overpaid CEO

This piece is part of an On Leadership round table exploring the reasons behind the persistence and prevalence of outsized executive pay.

High CEO pay is like a zombie that will not die.

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And it’s hard to understand why, considering most leadership advice and organizational theory would stop excessive pay packages dead in their tracks. They put too much emphasis on one person’s contribution, distort decisions, encourage excessive risk-taking, and damage morale at a time when the rest of the company is being forced to cut back.

Study after study also shows that high differentiation in pay between the CEO and lower-level staffers hurts organizational performance. And there is no shortage of outrage over CEOs who get rich whether their companies do well or not.

But social psychology helps to explain why so little has changed — and why not much is likely to, either. CEOs and directors are people, too, and succumb to a number of decision biases.

For one, when decisions are questioned (and decisions about CEO pay have certainly been under attack), the first thing people do is justify the choices which, after all, are part of their identity. This justification and rationalization of past decisions actually escalates one’s commitment to them. In the process of explaining their choices, leaders may not convince their opponents, but they will certainly further convince themselves.

Moreover, research shows that when under threat, leaders and the people who work for them retreat to what they know and do best, a process sometimes called the “threat rigidity” effect. External threats lead to internal rigidity and a resistance to change. Put these two processes together, and ironically, the very attacks on CEO pay are almost certainly reinforcing the status quo. No one wants to feel pushed around or pressured, powerful CEOs least of all.

CEOs and the boards of directors who set executive compensation are also hurt, perhaps unwittingly, by the powerful perches they occupy. These positions cause them to trust their own judgment more than empirical research.

And the research abounds. Yes, there are studies on the ineffectiveness of stock options, which seem to drive little more than risky behavior and the need to restate financial results. And yes, a meta-analysis of more than 200 studies finds no consistent relationship between CEO equity ownership and corporate performance. And scores of studies over the years demonstrated the weak connection between CEO pay and corporate performance.

But what makes anyone think CEOs, or for that matter the directors of their boards or their advisers, know or care about any of this? Recent studies show that power leads to — no big surprise — reduced reluctance to take advice. People in high-ranking positions know what they know, and many are remarkably unperturbed by any contrary evidence. Making matters worse, pay advisers are motivated to keep their clients happy, as compensation consultant Graef Crystal pointed out decades ago in his tell-all book In Search of Excess . It’s a dynamic that is still the same. That’s why pleas to use compensation practices backed up by good evidence fall largely on deaf ears.