Berkeleyan
Haas professor punctures myth of scarce CEO talent
| 18 August 2004
| |    Haas School of Business professor Marko Terviö |
Top corporate managers, sports figures, and Hollywood stars end up making millions of dollars a year because they are worth more than all the rest — right? Not necessarily, says Marko Terviö, assistant professor in the Economic Analysis and Policy group of the Haas School of Business.
Based on his studies of labor-market dynamics, Terviö argues that people who end up making eight-figure incomes (or more) are those who have been lucky enough to land rare positions and prove themselves — not necessarily the most talented people for the job. “What’s scarce is not the talent, but the number of opportunities for trying people out,” he says.
Terviö says the risk that a new person may be a worse performer than the incumbent gives most companies the incentive to hire from the same tried-and-true pool. When companies do not have a stake in the future value of the talent that they discover, but only in its immediate ability to produce output for the firm, proven but mediocre workers are likely to be hired over new, unproven talent. Competition for proven workers at all levels drives up wages of the talented and mediocre alike.
Terviö uses the studio system in Hollywood as an example. Before the late 1940s, new actors had to commit to seven-year contracts. If an actor turned out to be a star, the studio reaped a huge profit while maintaining the actor’s wages at a relatively low level. Such occasional boons made up for talent that spelled failure. Once the contract system ended in the late ’40s and was replaced by individualized, one-time agreements, however, actors could negotiate fees for each movie. As a result, studios were less motivated to find new faces because a flop in one movie could no longer be compensated for by a winner in another. New “finds” could easily be lured away by other studios. As studios reduced their experimentation with new talent, guaranteed star quality became an even scarcer commodity, pushing up wages for those with proven box-office records.
A similar phenomenon happens in the corporate world every day, says Terviö. “In jobs where companies worry about their workers being poached by other firms — such as in the top echelons of management — there is similarly less experimentation with new talent and high compensation for proven talent,” he explains. Even at other employment levels, a person who is “good enough” is generally preferred over an untried novice because a company knows that at least a certain level of output will be met. Thus talent markets tend to be plagued by mediocrity.
Terviö’s latest research ought to be of interest to many on campus: He’s investigating how social networks overcome problems of imperfect information in the hiring of Ph.D.s in academia.