Externally hired CEOs make 75 percent more than those promoted from within during their first year on the job, according to a new study by Equilar, an executive compensation data and consulting firm. Poor performers and small companies are the most likely to hire from outside.
At large-cap companies (S&P 500), externally hired CEOs received a median total compensation package of approximately $12.1 million in 2007, or 51.1 percent more than CEOs with at least two years of tenure, who made approximately $8.0 million. Internally-promoted CEOs made less than both groups in 2007, pulling in a median pay package of approximately $6.9 million.
To examine compensation differences between chief executives hired internally vs. those hired externally, Equilar compared the pay of these two groups to the compensation of tenured CEOs in place for at least two full years. Focusing on overall pay levels,
restricted stock awards, and stock option grants, the analysis highlights the fact that CEOs hired from outside a company continue to earn more in their first year than CEOs who are promoted from within.
“This study highlights the costs of poor succession planning by Boards and senior executives,” says Alexander Cwirko-Godycki, Research Manager at Equilar. “When companies don’t have a solid pool of internal CEO candidates to choose from, they often pay extra to outside executives by offering signing bonuses, large initial equity grants and make-whole payments.”
• Lower-Performing Companies Tend to Hire From Outside. In each of the three main segments of the S&P 1500 index, median three-year total shareholder return for companies that hired a CEO from outside was lower than for companies that internally promoted a CEO.
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Smaller Companies Tend to Hire From Outside. Additionally, Small Cap companies had the largest number of external CEO hires in 2007, representing 3.8 percent of CEOs, versus 3.1 percent at Mid Cap companies and 1.9 percent at Large Cap companies.
• Less is Still More for Internally Promoted CEOs. Although internally promoted CEOs made less in median total compensation than tenured CEOs or CEOs hired externally, they usually made much more in their first year as CEO than the year before.
• COO Position Acts as Best Stepping Stone to CEO. In all three segments of the S&P 1500
index, over 50.0 percent of all executives promoted to CEO from within a company held the chief operating officer position in the year before they became CEO. The next most prevalent stepping stone position was CFO.