The great CEO lottery

[sawyl]

Imagine a lottery. Next halve the main prize and use the money to increase the number of smaller prizes. Now consider how this might affect the number of tickets sold. Would it increase or reduce sales? Intuitively, most people seem to think that it would reduce sales.

Extrapolating wilding and not entirely seriously, M claimed that this meant that this example showed that it made sense to pay chief executives vastly inflated salaries. His premises seemed to be:

P1: Becoming a chief executive of a large company involves a lot of luck
P2: Anything that involves a lot of luck is like a lottery
C1: Therefore, becoming a CE is like winning a lottery.

P3: More people enter a lottery if the possible prize is big
C1: Becoming CE is like winning a lottery
P4: As many people as possible should want to be a CE
C2: Therefore, CE salaries should be as big as possible to encourage people.

So, in order to motivate staff, it makes sense to have an absurdly overpaid CE but only if the applicants for the post were drawn from internal candidates. I'm not sure that I buy it — I think almost every premise is open to dispute — but it's an entertaining idea that undermines the claims of most CEOs to have risen to the top by hard work and skill rather than simple luck...