You Don't Have to Break the Bank to Hire an Effective CEO
BY Adam Vaccaro
A new report explores the mistakes companies make when recruiting and paying executives, and what they can do to avoid them.
Maybe you're a founder of a company in a fast-growth phase and thinking it's time to bring on a professional CEO. Or perhaps you're closing in on retirement and are thinking about succession planning.
If either scenario sounds familiar, you might want to read a new report from Wharton and EMLYON business schools. Professors J. Scott Armstrong and Phillipe Jacquart analyzed more than 30 years of previous research and found that the way companies choose and evaluate CEOs is out of whack.
A quick caveat: The professors arrived at their conclusions by curating an extensive body of existing research. The authors of the previous studies corroborated the researchers' findings, indicating the professors did not misuse that primary research.
How Are CEOs Evaluated?
The researchers explored a number of studies showing that CEO pay and performance don't always go hand in hand. In other words, you can't necessarily buy success in a leader.
One example they cite: CEOs often receive a pay raise after winning an award or garnering positive press. The size of these raises might increase their salaries to more than 40 percent above those of their peers. But CEOs who received raises for winning awards fared worse than peers at comparable companies who didn't get raises; companies whose CEOs received raises saw their stock underperform that of their peers' companies by 15 percent to 26 percent over the next three years.
The authors of the report also found research showing executives are often evaluated on the basis of factors that could really only be considered luck--like changes in the economy, for instance, or, in the energy industry, fluctuations in the price of crude oil. "Evaluators are biased toward ignoring contextual factors and overly attributing outcomes to leaders," the researchers write.
Biases also play a big role in the executive recruitment process. The authors cite another study in which actors wore prostheses to appear overweight. The actors presented resumés with the same qualifications, but participants in the study were less willing to hire those wearing the body suits.
Taken altogether, these studies have led the professors to suggest there's a need to rethink how companies hire and compensate CEOs.
The researchers offer one radical idea that borrows, believe it or now, from government: using a sealed bid process. In short, this would involve asking recruiting firms to submit their recommendations with minimal identifying information about the candidate. Instead, you ask only for a list of the candidate's skills and qualifications and the salary requested. No face-to-face interview, and thus no opportunity to be clouded by bias.
This is as about as heavily an empirical approach to executive recruiting as you could muster, but I'm a little less than keen to recommend such a drastic approach to limiting your biases. Instead, I'd rather focus on another one of their findings: that promoting a leader from within might work best. Companies seeking a CEO often look for a shiny new object, but internally promoted executives come with a sense of loyalty to the company that, among other things, can manifest itself in smaller salary requirements.
That idea is supplemented by findings from a separate study: Companies that bring on new leaders who have been CEOs before perform worse than those that hire first-time CEOs. Other research has shown there is little difference in the performances of externally recruited and internally promoted executives.So when it comes to finding a new leader, the best value and the best results might come from right under your nose.