Don’t Be Seduced by Charisma
Is Your CEO Worth It?
Authors: Tosi, Henry L.; van Scotter, James
Date: Fourth Quarter 2010
Tags: compensation, CEO, charisma, bonus, investor capitalism
When a firm is not doing so well, and the board thinks about replacing the CEO, the first question is, “What kind of CEO do we need?” The answer is often the same: someone with lots of experience and a proven track record, but also, a highly charismatic figure. But how essential is it for the CEO to be charismatic? Do charismatic CEOs achieve better financial performance, which might justify the higher personal compensation they command? Be careful what you wish for, say the authors, because you might get more than you bargained for: A CEO who exudes charm, but turns out to be a dud. The corporate world is full of overpaid, underperforming executives, like Ken Lay, one of the CEOs included in a study by Henry L. Tosi, which examined the relationships among charisma, compensation and firm performance in a sample of Fortune 500 companies in 26 industries over a 10-year period. While revealing that there may sometimes be a place for a charismatic CEO when the firm is operating in a more turbulent environment, in general, boards and compensation committees would be well advised to see through the charm offensive and stick with measuring business performance.
Ken Lay, Enron, Lee Iacocca, Chrysler, Jack Welch, GE, Herb Kelleher, Southwest Airlines, Mary Kay, Mary Kay Cosmetics, Carlos Ghosn, Nissan, Sergio Marchionne, Fiat, John Scully, Apple
Summarizes the results of several studies, particularly one by Tosi et al., which examined the relationships among charisma, compensation and firm performance in a sample of Fortune 500 companies in 26 industries over a 10-year period.
About the Authors:
Henry L. Tosi is the McGriff Family Professor of Management at the Hough Graduate School of Business at the University of Florida and a visiting professor at SDA Bocconi in Milan, Italy.
James Van Scotter is a Ph.D. candidate at the Hough Graduate School of Business at the University of Florida.