The Limits of Meritocracy

Recently, I have discussed the limits of meritocracy with some friends.

One question we have been considering is: How can CEOs get away with demanding enormous compensation packages as well as severance agreements that ensure they will walk away rich at the company’s expense, even if they are terminated for incompetence?

Here are some possible answers, none of which is completely satisfactory:

  • It takes exceptional skill, expertise, and experience to run a company. Then why are new CEOs frequently brought in from another company or even another industry, and why do they often resort to predictable cost-cutting solutions like layoffs to turn companies around? Aren't competing candidates offering to do the same for more reasonable compensation?
  • Quid pro quo: boards that hire CEOs expect and get compensation in return. One friend suggested that "it's all just the same people hiring each other" while Barbarians at the Gate described former RJR Nabisco CEO F. Ross Johnson giving lucrative consulting business to members of the board that hired him.
  • The candidate for CEO promises the board value and shows a history of delivering value. Once in place, the CEO can afford to "underdeliver" on the promise, due to the cost of removing him or her.
  • The candidate convinces the board to compensate him or her for the opportunity cost of leaving a lucrative role.
  • The candidate convinces the board that if fired, he or she may never work again, and earns compensation for this risk in the form of an attractive severance agreement.

In any case, the astronomical rewards at the highest levels of a corporation seem to have less to do with proven results and more to do with political acumen, and the ability to sell one’s value before demonstrating results. This Business Week article attributes a CEO’s job security to his or her ability to satisfy a community of constituents, including some for whom the company’s performance is a secondary concern.

Another friend pointed out that meritocracy has its limits in martial arts as well. Higher ranks (symbolized by different colored belts) are supposed to be awarded on the basis of physical skill and knowledge of the culture, traditions, and moral code. Yet the highest ranks seem to get awarded to those who are well-liked by leaders, or who have brought money into the sport by forming schools or hosting tournaments. Furthermore, some schools make it easy to move up the ranks, to encourage their students to keep spending money on training.

Weekend America recently interviewed Rachel Toor, who worked in the Duke University admissions department and is the author of Admissions Confidential . She describes how University admissions departments attract as many qualified applicants as possible. Among those with the highest qualifications, the ones who make a positive impression on the admissions director, or whose families have the means to make a significant donation or endowment, have a critical advantage in the admissions process.

Random thoughts:

  • At the entry level of a business or other institution, advancement seems objective, based on standards ("what you know"). After some time, advancement seems more subjective, based on power or politics ("who you know").
  • One would expect that leaders of any institution are those who have mastered the ability to create win-win situations for large numbers of people. Perhaps some people attain leadership by creating win-win situations for small numbers of powerful people. What about the skill of bringing excellence out in others?
  • I've noted similarities between education, art (Tae Kwon Do) and business, but what about all the differences?
  • When people reach the highest levels of leadership, do they magically become corrupt? "Power tends to corrupt, and absolute power corrupts absolutely." has been attributed to Lord Acton.

Tags: Business, Philosophy, Politics

Updated at: 1 March 2008 12:03 AM