Economics, Literature and Scepticism

Powered by Blogger.

About Me

My photo
I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Friday, November 28, 2008

Ariely, Foster and CEOs

Posted by Simon Halliday | Friday, November 28, 2008 | Category: , |

Dan Ariely recently published a short op-ed in the NYT, arguing that excessive wages basically encourage laziness (gross simplification). Peter Foster of the FP responds. I thought it worthwhile to add my 2c have just written my most difficult exam this quarter (Advanced Game Theory) and feeling jubilant and like my opinion is worth something. My other reason for commenting is that I am currently three quarters of the way through Ariely's (audio) book Predictably Irrational, some of which I find interesting and to be of high quality, and other parts of which I think she would be left to the Department of Huh?

The reason I make the DoH comment is that I think that Ariely plays it a little bit loose with the ideas of parallelism and generalizability. What I mean here is that if you consider the experiment he talks about in the article, i.e. using people in India to mimic the working hours and payments of low, middle and high management is your sample in fact similar to that of the people who actually work in those jobs? I don't believe that the people who are the CEOs of the top companies in the world and who receive the inordinately high bonuses and salaries that they do are, in fact, like your average employee. I am not claiming that they are necessarily more intelligent, or that they have higher IQs, that could be the case. It could also be that they have way better social skills than anyone else you know, or that they need only to sleep four hours a night and get huge amounts of work done, or that they are simply more cut-throat, more ruthless and more savage with their opponents than your average Joe (the plumber). Consequently, getting a sample of average people and paying them more and they respond by working less than the medium and low paid people is odd, it is something that warrants its own explanation as an idea and argument separate to that made by Ariely. It cannot be extended to CEO, CFO, etc salary problems.

What do we need to understand for this? First, are CEOs paid less when they perform badly? Are they paid less when they did the same stupid thing that everyone else did? If they truly are miraculously talented people they should be able to see when other people are getting things wrong and they should have the guts, intellect and arguments to say 'X is getting Z wrong, so we should do Y instead of W.' CEO behavior should not simply be a case of bandwagon effects. What does this mean? More CEOs, especially in the US, should lose their jobs. They should not be given bonuses when their company performs, say, a standard deviation below the average. Moreover, during this period when a recession flows sweetly onwards and the ghosts of a possible depression haunts us, they should not be rewarding themselves, or even allowing their boards to reward them, when they should be doing everything they can to keep their jobs, keep the jobs of those below them and make their companies money. This is what normal salaries are for, not salaries that are more than 300 times the average are for. So yes CEOs could be paid less, but don't go making arguments about them being lazy, unintelligent or stupid. They're probably just greedy.

Currently have 0 comments: