Calculating worth of a good name to head the organization not always easy
Before J.C. Penney brought back its former CEO on an interim basis in April, the U.S. retailer hired former Apple executive Ron Johnson in 2011 to breathe new life into the company.
"J.C. Penney said we need a new CEO, but we need a CEO that can change us," says Dan Walter, president and CEO of San Francisco-based Performensation, a compensation consulting firm. "The first thing they had to do was look for people who were known for change and preferable for change that J.C. Penney thought would be useful for them."
Johnson had been well known for his work with Apple, pioneering the concept of the Apple retail store and its "Genius Bars."
A company like J.C. Penney may have looked at the reputation Johnson developed during his previous employment and attempted to put a value on it while making an offer to him to lead the company, Walter says.
Determining the worth of a CEO may be dependent on one's reputation, but a lot of how it's weighed is what the company has determined as its needs for a CEO, he says.
"The first thing you need to define is reputation. Is it reputation in business as a results oriented executive?" he says. "Is it the fact that you're known for being a great business manager or is it that you're known for being somebody that was successful somewhere?"
This is where the concept of the rock star CEO begins to appear — a term Walter calls "ridiculous."
"If you think about most rock stars, very few of them were successful in their second or third band after becoming a star," he says. "I think the same is true for CEOs — once you're a star somewhere, it's truly rare to find an individual that will be a star somewhere else."
While Walter admits there are some instances where a CEO shows great success in more than one company, it's uncommon to find a CEO who has delivered the same level of success after jumping companies.
"That's why a lot of times, the less visible but more known for their management skills — that type of CEO is often someone where the reputation (is) actually a better component to measure," Walter says, acknowledging J.C. Penney's decision to hire Johnson.
CEO hiring: Internal or external?
This is why so few companies hire a CEO from within, he says. Boards of directors will foster growth within a company all the way up to the top position, but that final step is one they're careful with, he says.
"That leap from CFO or COO to CEO doesn't happen that often," he says. "Since the board is by far the largest component of who chooses a CEO, the board tends to not take risks."
Amanda Voegeli, director, executive compensation at Towers Watson in Toronto, disagrees with Walter. She says hiring the CEO from within a company is actually becoming more of a popular trend.
"A lot of companies right now, at the board level when they're thinking about CEO successors, are actually doing a lot of hard work to look internally before they look externally," she says. "There's tons of focus on doing succession planning."
Hiring someone from within the organization who has all the knowledge and history of the organization can benefit the organization when looking at the long-term outlook, she says.
"Quite honestly, you can grow someone into a CEO role much cheaper and with slightly less risk than going out to the market," she says. "There's tons of discussion surrounding succession planning and I think it's probably been evolving for the past seven or eight years or something like that.
"They're putting in increasing processes around ensuring that they look internal before they look external or at least give internals a fair assessment rather than just defaulting to just going externally," she says.
Hiring from within eliminates a lot of risk, including whether they will fit into the organization, according to Voegeli.
It also eliminates the task of attempting to put a value on the reputation of someone outside of the organization, which she says can only really be defined as someone who meets all the requirements of the job.
"The supply and demand of executives is a reality and there are only so many people who can do unique jobs," she says. "Sometimes it requires experience in an industry or an experience in doing mergers and acquisitions or something that's important to the organization."
Bringing a successful CEO to head another company is a proven strategy that is not going away, Walter says, comparing it to the National Football League (NFL) in the United States. Like top football players, top CEOs have some control over the growth of their salaries.
"The Baltimore Ravens won the Super Bowl and their quarterback did not have a contract for the upcoming season," he says, explaining quarterback Joe Flacco and his management determined he could be the highest paid player in the league.
"He's the leader of the team, he's the best player," Walter says, adding Flacco refused to sign an initial offer from the Ravens.
When the Ravens presented Flacco with their next contract, he was, indeed, offered the highest salary paid at the time by an NFL team.
"It was never about earning the money and all that," Flacco said at a press conference announcing the new contract. "It was about earning the respect."
It's Flacco's response that interests Walter the most.
"Really, so if they just told you they respected you a whole lot and offered you $5 million less, you would have signed that contract? No, the fact is the scorecard for respect is the money," he says.
CEOs are very similar, he says.
"You know, it's great, I have a wonderful reputation, I really love the fact that you guys are going to make this a wonderful place for me, but look at what everyone else is getting paid," he says. "You're the one courting me, so I must be better than at least half those guys and you're a really important company so I'm probably better than all except 20 per cent of those guys or girls."