The ‘Moneyball’ approach to hiring CEOs

It was the lesson of the bestselling book-turned-movie Moneyball: 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.

Those instincts, they note, are often triggered by factors unrelated to a person’s ability to do the job at hand. Their review included a 1994 experiment in which participants viewed videotaped job interviews, which included some candidates who wore prostheses to appear overweight. When viewing the overweight candidates, participants made negative inferences despite no evidence that body type makes any difference in executive performance, the authors write.

Armstrong says companies have more precise methods at their disposal, but are so entrenched in traditional, subjective recruitment methods that they are reluctant to experiment with new ideas. “As Winston Churchill said: ‘Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing had happened,’” notes Armstrong.

The biggest shortcoming of executive recruitment, the researchers say, is the failure to apply Meehl’s rule: never meet a job candidate until you decide to make them an offer. The late Paul E. Meehl, a psychologist from the University of Minnesota, advised using relevant, quantifiable factors to judge candidates. Instead, height, body build, gender, accent and looks often get considered, the authors note.

For instance, Jacquart and Armstrong cite a study of symphonic auditions, in which the probability that a female musician would be hired increased when the candidates were judged anonymously from behind a screen.

Sealed bids

The authors suggest that corporate boards can use a method similar to sealed bids to help select top executives. Instead of coming in for a traditional face-to-face interview, candidates would be allowed to submit sealed bids about what they can do for the organisation, what skills they possess, how much money they require, how long a contract they need and whether they would require a pay-off if asked to resign.

The proposals by each candidate would be cleared of any information unrelated immediately to job performance, such as gender, weight, height, voice or other physical attributes. The bids would then be given to a committee that would evaluate the anonymous candidates using a rating sheet. The candidates who passed that initial screening would then take a battery of tests where they would be evaluated for traits like cognitive abilities, values and self-control.

Assessment centres, the authors write, can help demonstrate whether the job candidates can run effective meetings, make sense of data, listen to others, write persuasive reports and develop strategic plans. That information can be placed into an ‘index model’ for choosing the leading candidates that would sum up their positive attributes, they add.

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