Today's Wall Street Journal is a gold mine of interesting articles and topics on which to comment.
For this post, I'll focus on the paper's Marketplace article, "How To Fire a CEO." The gist of the pieces is that few CEOs can, it appears, actually be fired for cause. Outside of grossly inappropriate personal behavior, fraud, or embezzlement, simple poor performance of the duties for which s/he is compensated does not, evidently, merit discharge of the modern CEO.
There seems to be a significant inconsistency between the CEO's office and even his or her executive team. Let's take Wal-Mart, for example. It has, I am sure, an SVP or VP of Sales. Sales, however, have been lackluster. The company's recent marketing strategies aren't working very well, and sales are disappointing.
Would we not expect, at some point, that Lee Scott, Wal-Mart's CEO, might replace his head of sales? And would this not be because that executive failed to meet his or her management objectives, presumably involving sales goals?
Why can't the board, upon extending a contract to a CEO, include performance objectives? As I wrote here in a prior post, why does a board not hire a CEO on terms which substantially enrich the CEO, on a lagged basis, if s/he meets growth and total return objectives, but does not if they are not met?
Some will argue that really qualified CEOs won't take that kind of risk. Really? I'd expect at least a few would rise to the challenge of running a large company, plus making substantially more if they succeed, than if they fail. Further, what does the company have to lose? Compensating a CEO to not succeed will probably just get you another Jeff Immelt, the now-wealthy, and becoming wealthier, under-performing CEO of GE.
Ought not sauce for the goose be sauce for the gander, as well? If a CEO can, and does, replace under-performing executives on her or his team, why does not the board of directors do likewise? Include performance objectives in the CEO's contract, and enforce them.
Here's the dirtiest little secret about that, by the way. At today's average CEO compensation levels of $11.8MM, as reported here by The Corporate Library, even a failure as CEO at a large-cap firm is well on the way to retirement after only a year's failure in the job. Changing compensation to more variable, and less fixed, as I suggested in the earlier linked post, will at least make failures less expensive for a company.
However, for starters, how about boards simply setting performance objectives for their CEOs, and then acting on failure to perform?
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2 comments:
What you propose is of course very sensible. That alone ensures that it will never be enacted.
My guess is that when dealing with CEO spot for large companies, in the vast majority of cases, it's the company who wants a particular candidate more than the candiadte wants the particular company. Additionally, I think today's would-be CEO is less interested in the challegne of running, say, HP, than the financial rewards. And those rewards can come from any number of less challenging companies to run.
Thus, a seller's market, and the seller gets the terms s/he wants. Which of course is going to be "$13 million a year . . . THEN the incentives kick in if I do well." And as you pointed out, there's no incentive to keep at it for very long, given the Lotto-like sums awarded per year for basically doing an average or even below average job.
Ben & Jerry's takes the most radical approach to this I've seen: The CEO can not make more than 15 times the annual compensation of the lowest-paid employee. Presumably the Fortune 500 don't want to go that route, but for a CEO who has failed elsewhere . . . it seems the pro sports approach would be wise: a short-term, incentive-laden contract.
You are probably correct that it is a seller's market for CEOs of large cap companies. How sad is that?
From my days as a senior strategist for several companies, and consultant/research director at several consulting firms, I have seen some pretty pathetic CEO behavior and performance tolerated by corporate boards.
It is just amazing that these boards compete to hire CEOs who, for the most part, ineptly lead and manage the firm for 2-4 years. Given average experience across companies, you'd think boards would begin to try broader searches and fixate less on the same small group of (typically underperforming) CEOs.
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