Rewards for falling off a horse: Bad corporate governance is enabling managers to receive pay for luck

• Published in: Organizational dynamics Vol. 46; no. 3; p. 189
• Main Author: Houdek, Petr
• Format: Journal Article
• Language: English
• Published: New York Elsevier Science Ltd 01-07-2017
• Subjects: Attribution; Bonus systems; Bonuses; Chance; Chief executives; Corporate governance; Diversification; Labor market; Managers; Profits; Rewards; Stockholders; Windfall profits; United States > US
• ISSN: 0090-2616; 1873-3530
• DOI: 10.1016/j.orgdyn.2017.05.004

The purpose of this short article is to show that shareholders often reward the managers for fatting off a horse. Just as Po Sou's son, they had blind Luck, and by making none or bad decisions or actions, they brought their companies to success in the end. In their influential study, Bertrand and Muttainathan have shown that rewards of CEOs come from performance that arose from luck. That is, exogenous events that managers did not influence, such as windfall profits resulted in large bonuses. Currently, CEOs are rewarded for the improvement of aggregate economic or sectorial conditions, even though sector performance is outside their control. I have presented several reasons explaining why executives receive rewards for luck. Processes enabling this phenomenon are psychological, that is they are due to an incorrect attribution of success to CEO skills, as well as rational, dependent on the mechanisms of rewarding executives, the labor market or optimal sector diversification.