In his April 2, 2010 article in the New York Times, When a First Pick Isn’t the Best Pick Richard Thaler writes regarding the NFL draft: “… the teams choosing early in the draft generally don’t, in fact, get the players that provide the most value per dollar.” He goes on to say that “…the first pick in the draft is, on average, the least valuable in the entire first round.”
He concludes his article with the following: “So, if teams’ ability to select players is only slightly better than flipping coins, should we expect that corporations can do any better in picking their chief executives? “
We found his article interesting and we agree with his premise, but also disagree with his comments and conclusions.
There is an interesting book by Michael Lewis titled Moneyball: The Art Of Winning An Unfair Game published in 2003 that follows the unique and successful approach used by the Oakland A’s GM Billy Bean to draft players for the Oakland A’s. Dan Ackman reviewed this book in May 28, 2003 for Forbes and says: “It has long been an article of faith among fans and team owners–especially small-market owners–that the poorer teams could not compete with the richer teams, at least not for long. The A’s have defied this logic and embarrassed the economic determinists, including Bud Selig, baseball’s commissioner…”
So it seems that ‘paying top dollar for major league baseball or foot ball players can’t guarantee success, but talent management, whether athletic talent or executive talent, is all about the selection process. And the selection process requires that the GM or Board of Directors know what characteristics are important in the talent they are looking for. We disagree with Mr. Thaler’s comment that “chief executives hired from outside a particular company have been performing mostly in private.” In fact, for all CEO’s at publicly traded companies, their performance is essentially reported all day every day with a 15 minute delay on the stock tickers. That is hardly working in “private”.
Further, most CEO’s or individuals being considered for a position of a CEO are highly seasoned executives. They have operated in their respective arenas for years and there is little comparison with rookie athletes, whose experience has been on high school and college fields.
With any selection process, the human factor that influences the ultimate success of a new hire or even of a person newly promoted from within can never be predicted with certainty.
So with all the unknowns what should Boards consider when looking for a new CEO? Even though, as Thaler says, CEOs aren’t given IQ tests like NFL draftees, CEOs are certainly hired for their intellect. But it is much more about the CEO’s ability to apply intellect and skills in the context of that job. For the CEO it is more an issue of EQ (“Emotional IQ”) than IQ that would help to predict success in that job. From our experience, great CEOs have certain characteristics: they have a great capacity for vision, they are outstanding communicators, they have experience in high visibility roles, they possess a business acumen and sharpness that permits them to make sound decisions with imperfect information, and they show political savvy and can successfully deal both up and down the chain of command. Perhaps the most important characteristic for CEOs is that they demonstrate outstanding judgment.
All that being said, it really isn’t how much a company pays a CEO that is important, it is how that pay is structured and what behaviors that structure drives. As we shared in our blog Creating Quality Compensation, when designing CEO pay a company must understand its business strategy: including general, value chain and specific business strategies and align its executive rewards programs with these strategies.
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