What’s the real cost of a CEO?August 1, 2018
Are CEOs cut-out to add real value to an organisation? More importantly, do they have the necessary skills to deliver on what they are worth?
CPA’s CEO, Alex Malley, walked away with a termination payment equivalent to 2.7 years’ salary after a long battle with some disgruntled members, and questionable governance issues.
AMP CEO, Craig Meller, recently stepped down after AMP admitted to charging clients, and lying about it, for advice they never received during his 4-year tenure, where he earned $8.3M in 2017.
Finally, what about Andy Penn, the Telstra CEO whose annual remuneration of $5.2M does not align with their current market cap reduction of $28BN.
We have seen many CEOs fail in their duty of care (and even more who have not been held accountable) or fail to deliver value for an organisation. This raises a lot of questions.
With all employees now being held accountable for the rewards upon which their role delivers, why do we not hold our ‘pinnacle role’ at the top of the structure to the same degree and what timeframe do we give our leaders to deliver?
What does it take to really deliver value to an organisation and how is that top role really measured on what they achieve?
An organisation’s greatest asset
CEOs and any of the C-suite roles are said to be an organisation’s greatest asset.
In the traditional hierarchical structure, everyone below looks for leadership, looks for inspiration and looks for motivation to those at the top who are steering the organisation in (supposedly) the right direction.
Yet, more and more CEOs don’t live up to expected results. More and more organisations are failing their stakeholders today because of lack lustre leadership.
In the August 2017 article ‘CEO Net Present Value’, the word’s leadership advisory firm, Egon Zehnder reported:
There is no recouping the value from a failed CEO … Yet boards rarely analyze CEO candidates with the rigor they apply to capital expenditures. Rather, they seek to minimize risk by defaulting to what common sense suggests is a safe choice. Unfortunately, the true risks and limitations of their “safe” choice may surface only after the fact, as the company suffers the consequences – missed opportunities, underperformance, disappointing growth, or even irrelevance.
Any business, whether large or small, public listed or start-up entrepreneurial sole trader when making a large, important business decision will/should always perform a business case analysis. A case where the expected revenues are calculated and weighed up and assessed against the cost of generating those revenues.
This business case analysis should include whether you choose to take on a CEO or not.
What is it worth?
Rather than delivering annual operating results or one-dimensional growth expectations, imagine if executives carried a value creation target. A net present value to help assess their potential additional ‘worth’ that they would bring to a business. And furthermore, what if that Value Creation Target was a measure calculated both internally and externally in an organisation…
The CEO net present value would be calculated BEFORE that person is appointed to ensure clarity for the individual, the business, and the employees to understand what is being asked of the CEO in terms of their performance. How powerful would it be to share internally what the success measures are for the top role …
For those charged with employing a CEO, as part of the recruitment process, they would then rate on a scale of 1 to 10, where that candidate sat in terms of leadership capability.
This would mean that the CEO was accountable to his or her organisation directly. Each organisation would have a leadership review panel or committee, which in addition to the Board and external stakeholders, measured the value of the leadership and CEO specifically.
How powerful would an organisation be if they measured the success (or not) internally of their leaders? Now I get many would argue that the recruitment of a CEO is a long laborious process, and that once engaged there is an ongoing performance review process – there may even be 360-degree feedback – but what I am suggesting here is different because this takes accountability to whole another level.
Could this be an opportunity to close the leadership gap that exists in so many organisations. The gap that exists between the ‘leaders’ and the ‘do-ers’, when employees don’t understand the strategy, are confused and, worse still, don’t believe in the strategy? Imagine how this internal accountability measure might close the gap and employees feel they have a mechanism to feedback to the CEO and leadership team outside of the obligatory feedback survey…
If CEOs had a number, a net present value, then all stakeholders could see, measure and hold them accountable to it.
In the same 2017 article, Egon Zehnder uses the following model to assess their candidates for suitable CEO roles:
CEO NPV = Projected Value Creation / Leadership Risks
The Projected Value Creation depends largely on the CEO’s capacity to create a performance culture that permeates the entire company.
Looking at this equation, creating a culture of success from the CEO down helps to drive value through the business. It’s not good enough to simply pay lip service to success, the CEO would need to drive the business forward, by getting out and talking to customers, employees and industry partners every day.
Having these real conversations would also mean they are able to pivot and transform the organisation’s strategy, when required, to predict future requirements in their market, and to allow for employees to help spot such changes.
Perhaps shining a light on the CEO – being clear about what is expected and, more importantly, what is delivered – may help eradicate some of the issues like the all-too-common financial ‘result/disaster’ that happened on the CEO watch.
Think about a CEO ‘success-o-meter’ in the employee shared space, where the success of the CEO is measured and shared by the internal review committee. Could this be a better motivator rather than another ping-pong table, it might also get a higher staff engagement score…
Predicting market shifts and pivoting where necessary will position the CEO and the organisation for future opportunities.