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The Ombudsman: The “Wicked” Environment of CEO Pay

Author

Listed:
  • Robin M. Hogarth

    (Universitat Pompeu Fabra and Barcelona Graduate School of Economics, 08005 Barcelona, Spain)

  • Gueorgui I. Kolev

    (Middlesex University Business School, London NW4 4BT, United Kingdom)

Abstract

We applaud Jacquart and Armstrong’s systematic, evidence-based review of the contentious issue of CEO remuneration. We augment their analysis. First, we highlight the lack of demonstrated validity of unaided expert judgment to set CEO remuneration. The settings in which such judgments are made do not facilitate learning through experience and are subject to many biases. In particular, we briefly describe our empirical study that demonstrates illusory correlation in the form of a relationship between golfing ability and CEO remuneration, which does not mirror CEO performance. Second, we provide an analysis of data that shows that boards of directors are unable to accurately predict future performance of CEOs when determining remuneration packages. Third, we advocate the use of systematic methods in setting CEO remuneration.

Suggested Citation

  • Robin M. Hogarth & Gueorgui I. Kolev, 2013. "The Ombudsman: The “Wicked” Environment of CEO Pay," Interfaces, INFORMS, vol. 43(6), pages 596-598, December.
    • Handle: RePEc:inm:orinte:v:43:y:2013:i:6:p:596-598
    DOI: 10.1287/inte.2013.0708
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    References listed on IDEAS

    as
    1. Murphy, Kevin J., 2013. "Executive Compensation: Where We Are, and How We Got There," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 211-356, Elsevier.
    2. Koenker, Roger & Bassett, Gilbert, Jr, 1982. "Robust Tests for Heteroscedasticity Based on Regression Quantiles," Econometrica, Econometric Society, vol. 50(1), pages 43-61, January.
    3. Philippe Jacquart & J. Scott Armstrong, 2013. "The Ombudsman: Are Top Executives Paid Enough? An Evidence-Based Review," Interfaces, INFORMS, vol. 43(6), pages 580-589, December.
    4. Steven N. Kaplan, 2012. "Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges," NBER Working Papers 18395, National Bureau of Economic Research, Inc.
    5. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-b.
    6. G.M. Constantinides & M. Harris & R. M. Stulz (ed.), 2013. "Handbook of the Economics of Finance," Handbook of the Economics of Finance, Elsevier, volume 2, number 2-a.
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    Cited by:

    1. J. Scott Armstrong & Philippe Jacquart, 2013. "The Ombudsman: Is the Evidence Sufficient to Take Action on Executive Pay? Reply to Commentators," Interfaces, INFORMS, vol. 43(6), pages 602-604, December.
    2. Dirk Martignoni & Anoop Menon & Nicolaj Siggelkow, 2016. "Consequences of misspecified mental models: Contrasting effects and the role of cognitive fit," Strategic Management Journal, Wiley Blackwell, vol. 37(13), pages 2545-2568, December.

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