What makes a good chief executive? And should companies pay more attention to performance before handing out fat bonuses? Tim Latham investigates....
A chief executive's average tenure in office is reducing, they are decreasingly likely to have "come up through the ranks" of their organisations, they are enjoying higher multiples of average pay than ever and their rewards for failure frequently appear to be higher than rewards for success.
From the CEO's perspective, these themes may be viewed as a mixture of good and bad news, but from the point of view of shareholders and other stakeholders it begs the question: are these issues related and are
Don't get comfortable
Boards and shareholders, quite rightly, require their CEOs to perform. In terms of the predominant "Western" business culture, this means having one's performance analysed at least quarterly, if not monthly
or even weekly.
In upwardly moving markets, this "real time" analysis might be viewed as an irritation, but when more dramatic strategic changes are required in order to turn around a company's fortunes, the expectation of instant results is frequently unrealistic and can ultimately be damaging to the long-term health of the organisation.
Over the past decade or so a great deal of work has gone into trying to make even our largest organisations more efficient, encouraging swifter responses to changes in circumstances, customer demands, technology and so on.
But, thankfully, even our most technologically advanced businesses cannot just be reprogrammed overnight - they are made
up of individuals who will need to convince themselves of the evidence and the need for change and then may well need training and development in order to re-orient themselves. The chief executive who can genuinely
re-orient a large organisation's culture in
less than a year or two is indeed rare.
When faced with difficult circumstances, boards of directors and shareholders will rightly want to see strong, decisive action from the CEO to steer a fresh course. But,
to make the analogy with a supertanker, a quick turn of the wheel can be deceptive
and real adjustments to course take time.
In this country, the government has a term of office of up to five years and the recent election appears to provide evidence that we didn't fully expect their agenda of change to public services to have shown substantive results in the first term.
Pressure on CEOs to demonstrate immediate results can create problems. It may lead them to take dramatic, highly visible actions such as downsizing, which can have adverse effects upon the long-term fabric of the
organisation. These are complex and
fine judgments and have to be carefully weighed up.
Foot soldier or parachutist?
One of the most remarkable trends over the past decade has been CEO's dramatic reduction in average time with one employer. To understand this more fully, we need to examine at least two influences.
On the one hand, probably unsurprisingly, our largest businesses are most likely to have "grown their own" CEO. This is surely because, in large organisations, there are greater opportunities to gain the breadth
of experience in different functions and
markets required of the rounded CEO.
On the other hand, it is in these large organisations that the average CEO's time
in office has reduced most dramatically,
indicating the trend in large businesses
has increasingly been towards "parachuting in" the new CEO.
Is the trend towards "mercenary parachutist over loyal foot soldier" a healthy one? Clearly the reduced time in office and therefore higher churn rate of CEOs is closely linked to increasingly bringing in talent from outside - there just isn't the pool of talent internally to satisfy the scale of changes
at the top, even in large companies.
Secondly, boards need to make careful
judgments about throwing the baby out with the bath water. If a change of CEO is needed, there can be concerns that his or her internal heir apparent is too closely associated with the old guard to signal sufficient change to the various constituencies. Therefore bringing in some fresh blood from outside
can be more beneficial. Also, in today's
rapidly changing environment, the CEO's
role could, in some respects, be compared to that of a series of interim managers seeing the company through various projects, one character being right for the downsizing phase, another for organic growth and yet another to lead the company through
A one-way bet?
Talent comes at a premium and should be rewarded in line with achievement. The trouble arises when some CEOs appear to be on a one-way bet with nothing to lose and the reward for failure is higher than the reward for success. For instance recent past CEOs of Coca-Cola, GTECH and Mattel have all left office with multi-million pound severance deals, in one case amounting to about £80m.
Many boards have taken the view that in order to secure the services of a high quality CEO they must put in place a substantial safety net.
While there is much to be said for letting the CEO (and all other staff) go with a
reasonable degree of support, a problem arises if the safety net is a more comfortable place to be than on the high wire.
In the rising markets that we have enjoyed up until recently, most attempts to moderate reward and to really link it more closely with performance were doomed to failure as the "war for talent" became a self-fulfilling prophecy. Perhaps now as the demand/supply equation moves more into balance we will see boards drawing more clear-cut and defensible policies on top management reward and safety nets - but will their nerve hold during the next upturn?
The way ahead
For years we have accepted that top sports people have a limited shelf-life. We expect them to maximise their earnings while
they can and to be replaced by a new star
in a couple of years' time. It appears that
we have been heading in the same direction with our CEOs.
Whereas we can easily establish who are the fastest 100m sprinters at any one time,
our measures for CEO performance are far less precise and we frequently don't even agree on what the relevant measures
If we are to require our business leaders to perform like sports stars and to be rewarded accordingly, we need to develop more sophisticated measures of performance and to link reward to these measures.
But before getting too carried away with the sporting analogy, we would also do well
to remember that, unlike most sports, older age doesn't preclude excellent performance and we may well start to see a few grey hairs being viewed as a positive attribute again in the coming years.