Overpaid Bosses? It’s Rational!

Why are higher ups so grossly overpaid? Pretty much everyone agrees that they are (even the higher ups feel the even more higher ups are overpaid!); but why are things that way? Tim Harford analyzed just that question in his book, The Logic of Life. His answer is both interesting and depressing.

The higher up you go, luck plays an increasingly important role in the outcome of your work. The General Manager may allocate funds for a new product: whether or not it succeeds is a function of so many uncontrollable variables. Like a recession. Or the best brains quitting halfway into the project. Or a new game changer launched by a competitor. You get the idea.

As luck’s role increases, the career risk for the guy higher up increases. When Microsoft’s tablets bombed, the engineers who worked on it will easily get other jobs. But the CEO (is rumoured to have) lost his job (it cost $900 million). The CEO’s job may be an extreme example, but the principle applies for middle and upper managers too. They become the visible face of failure. And with that kind of publicity, how easily can the guy get another job? So, Harford argues, their high pay is partly to compensate for the risk that comes up with the job.

The other reason is that a Vice-President who already makes a million isn’t going to be motivated by a 20% hike at the next role, would he? The only way to motivate a guy who already makes a lot is to dangle (even more) obscene amounts at the next rung! Hell, even Dilbert, the “lowly” engineer feels that way:

And lastly, Harford says that if you’re in a designation where luck has a role to play (medium to large), would you work your butt off to get to that next level? Or would you say “I might not rise despite my hard work because luck has such a big role, so why bother?” Well, to make you slog in such an environment, the incentive has to be very, very high. Like an exorbitant pay hike.

Well, that’s Harford’s theory anyway. And right or not, it is definitely logically consistent. Which leads to the depressing conclusion:
“A rational world isn’t necessarily a perfect world, and nowhere is that more true than in the office.”

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