The “Moneyball” Approach to Hiring CEOs

Moneyball
Here is a brief excerpt from an article featured by the Knowledge@Wharton website of the Wharton School at the University of Pennsylvania. To read the complete article and check out other resources, please click here.

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It was the lesson of the best-selling book-turned-movie, Moneyball: The Art of Winning an Unfair Game is this: Don’t throw money at big-name baseball players or judge future performance by purely physical attributes. Assess them, instead, by more relevant measurements, like their on-base percentage.

Wharton professor J. Scott Armstrong and Philippe Jacquart of EMLYON Business School in Écully, France, say the same principles can be applied to choosing corporate executives. In a recent paper, they challenge the popular belief that higher pay leads to selecting chief executive officers who will outperform their lower-compensated counterparts.

After doing an extensive review of existing experimental research, Armstrong and Jacquart concluded that just the opposite is true — higher pay does not attract better talent, and can be expected to undermine performance. They suggest that a better method of choosing the right leader is to use quantifiable measures to judge candidates for the job, anonymously if possible. Their paper, “Are Top Executives Paid Enough? An Evidence-Based Review,” was published, along with commentaries, in the November-December edition of the journal, Interfaces.

The authors say executive search firms and corporate boards typically use “unaided expert judgment” — i.e., gut instinct — in making decisions about hiring CEOs, who in 2008 were paid 185 times more than the average worker.

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To read the complete report on the research, please click here.

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