Inside The Head of an Overpaid CEO

by Wall Street Job Report on April 20, 2012

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

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.

Read the full story at the Washington Post.

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