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October 10, 2021

Why paying CEOs to keep them from leaving is wrong

In 2010, Mark Hurd, amid allegations of sexual harassment, resigned his post as the CEO of Hewlett-Packard.

Ultimately, a probe found Hurd had not violated the computer company’s sexual harassment policy (instead, he had merely compromised HP’s standards of business conduct), but no matter: the exec was out.

Right away, Hurd’s friend and Oracle CEO Larry Ellison ripped the move – “The HP board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago,” he wrote in an email to the New York Times – and decided to act. Within a month, Hurd was brought on as co-president and member of the board at Oracle.

By many accounts, Hurd has been a hit at Oracle so far, though is the executive’s success at consecutive companies rare in the business world? According to one new study, CEOs’ skills don’t necessarily translate, so perhaps it’s best we ditch the old adage that we need to pay through the nose for an executive out of fear they bolt for greener pastures.

During and after the recession, there has been no topic as hotly contested as ballooning CEO pay, which remarkably has been an easy defend for supporters of high executive compensation. If you want the best, you have to pay for the best, they say. Fork it over, or your company’s CEO is likely to be lured away.

*Bing: Who is Canada’s highest-paid CEO?

In reality, a new study shows, such peer-group benchmarks may be a myth. Researchers at the University of Delaware found that not only is it rare that CEOs succeed at new companies, but also unlikely that CEOs will even move to lead another business.

According to an analysis of about 1,800 CEO successions from 1993 to 2005, less than two per cent of new company chief execs had held the same position at a public company before their new jobs.

“It appears that the threat to go elsewhere is muted for a sitting CEO,” the study’s authors said. “Particularly for the large firms … CEOs are rarely traded in any market for their talents.”

The study’s authors argue that what drives CEO pay, then, is something of a false market, a bidding process drummed up for executive talent that by most accounts should not exist.

“It’s a false paradox,” one author said about the notion CEOs need to be paid through the roof to keep them around. “(It’s) based on the theory of transferability of talent. But we found that CEO skills are very firm-specific. CEOs don’t move very often, but when they do, they’re flops.”

By Jason Buckland, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...