They are arguing about this over at MR. Are CEOs paid their value added?
I think this has a lot to do with sample size. When deciding how much a CEO is worth, the board has to make its decision on a relative small amount of evidence. They base their decision on past performance, but the problem is that that people don't have enough years of past performance to be statistically significant. When your conclusions are based on small amounts of evidence, you are going to overestimate the effect of the variable on the results.
Essentially, results vary partly because of randomness. For example a company may have a good quarter or a bad quarter for reasons that have nothing to do with the CEO, and for factors that you can't control for. The shorter time period you look at, the more randomness you are going to see and therefore the quality of CEOs will seem to vary more. If you look at a longer time period you're going to get something called "regression to the mean" also known as "reversion to mediocrity". As in when random variation starts to fade away, everyone starts to look more average.
And when hiring someone, you're paying them for their expected future performance, knowing that a good CEO could well mean a difference of billions of dollars in profits for shareholders. But, that guy who did so well at that other company was probably doing better than his average. Part of it was due to luck. If a CEO has a particularly good quarter, the next one will probably be worse, and vice verse for a bad one. Over time, as you start to control for randomness, people become less exceptional. And you see they aren't worth paying exceptionally large salaries.
The problem is that people aren't around long enough for "reversion to mediocrity" to set in enough. And people routinely fail to take regression to the mean into account. This leads them to overestimate the effect of individuals, whether in business or sports or politics. The man at the top on an organization is less important than people think. And so companies spend too much money attracting top performing CEOs only to watch "reversion to mediocrity" set in.
A CEO that can really improve the company and its stock value would be worth a great deal of money. The problem is you can't tell who that CEO is. And if you pay them for performance, much of that is just randomizing their salary.
I'm not saying that a persons success or failure is not affected by hard work and ability (like a conservative would argue) or on connections and corruption (like a liberal would argue). But lets not forget the importance of Lady Fortune as well.
