Let’s start with the facts. In a 10-year study of 1,500 corporation with the biggest market caps, three noted business school professors determined that CEO compensation, incentive pay and tenure were all negatively related to shareholder returns. The reason? Overconfidence leading to bad strategic decisions.
Have you seen this? I bet you have. Is it time to question some of our assumptions about compensation and what produces results? Probably.
If nothing else, there is a clear case here for executive humility.
Past performance does not guarantee future results. Every serious investor knows that to be true. And yet, we all tend to get a little full of ourselves when we’ve had a good run. The better and more sustained our performance, the more overconfident we’re likely to become. It’s human nature. And it goes way beyond investing.
Success is its own worst enemy. Success is self-limiting. It applies to everyone to varying degrees, most notably CEOs and business leaders of companies big and small. And while that concept may fly in the face of common management doctrine, it explains why so many formerly-successful executives end up destroying enormous amounts of shareholder value and personal wealth.