CEO compensation is not an incidental line item contributor on most corporate proxy statements when it comes to declaring the cost of executive compensation. And while most boards of directors have a fairly intuitive sense of what they need to hire and pay to retain executive talent among their COOs, CMOs, CFOs, CPOs etc., sufficient CEO compensation can be far more elusive and difficult to justify to shareholders.
The managerial skills required of CEOs clearly demand a very high level of competency in finance, marketing and operations but in reality, their primary organizational acumen must lie with their ability to orchestrate the aggregate performance of those assigned to separate measureable performance areas and facilitate the greatest value that can be derived from the sum of the parts – an elusive and challenging task in and of itself.
As it turns out, it would also follow that CEO success is determined by one's intimate and functional working knowledge of the entire organization. This postulate may go quite a ways to debunk the myth that CEO skills are easily transferable and whether, or not, the risk of their jumping ship for higher compensation elsewhere should be considered when determining pay. A
recent NYT article points out that "New research by Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, and Craig K. Ferrere, one of its Edgar S. Woolard fellows, begins by attacking this conventional wisdom. Mr. Elson and Mr. Ferrere conclude, contrary to the prevailing line, that chief executives can't readily transfer their skills from one company to another. In other words, the argument that C.E.O.'s will leave if they aren't compensated well, perhaps even lavishly, is bogus. [and in fact] Using the peer-group benchmark only pushes pay up and up." Mr Elson goes on to state"... we found that C.E.O. skills are very firm-specific. C.E.O.'s don't move very often, but when they do, they're flops."
Yet "This peer-group benchmark -- how executive pay at one company stacks up against pay at another -- is a big driver of ever-rising compensation. Boards say it helps them set pay based on what the market will bear." The Times quotes Messrs Elson and Ferrere futher noting "numerous academic studies indicating that C.E.O.'s selected from within a company perform better than outsiders, especially in the creation of long-term shareholder value. [and that] There is no conclusive empirical evidence that outside succession leads to more favorable corporate performance, or even that good performance at one company can accurately predict success at another," the authors conclude. "In short, executive skills cannot pass the most basic test of generality: transferability."
So if you've been gunning for that top job in the company you spend most of your waking hours working for, you might want to think about how you have far more transferable and flexible future opportunities at your current rank in our perpetually changing marketplace. Or in other words, it really is lonely at the top.