July, 1997 - Vol. 1, No. 10

The Value of Recruiting Outside Executives

Wharton professor Constance Helfat and colleague Dawn Harris of Loyola University have compared inside and outside successors for 305 chief executives who stepped down from large U.S. firms in 1978-87. Outsiders are defined are those managers who become chief executive after less than two years with the firm. Helfat and Harris reasoned that executives recruited from other companies are likely to be compensated more handsomely than inside successors. Outsiders face greater risks in taking a top position than insiders since their skills are less tested by -- and specific to -- the company. As a result, the recruiting firm is likely to pay more to hire them.

Focusing on the new CEO's salary and bonus at the end of the first year, the researchers find that:

• Outsiders receive a pay premium of 30 percent on average over insiders.
• Executives coming from outside the company but inside the industry are compensated 23 percent above company insiders.
• Executives coming from outside the company and outside the industry obtain a 36 percent premium over insiders.

Viewed from the company side, when a firm goes for outsiders it is willing to pay 36 percent more for executives with generic management and leadership skills but no industry- or company-specific experience.

Which companies decide its worth the difference? Helfat and Harris report that it is the poor performers: the return on assets among firms going to the outside for top talent is only 38 percent of the return among firms that select from the inside.

Source: Dawn Harris and Constance Helfat, "Specificity of CEO Human Capital and Compensation," Strategic Management Journal, forthcoming.

Leaders on Leadership

Leader to Leader is a new quarterly publication from the Drucker foundation that offers commentary on and by leaders. In the spring 1997 issue, Patrick L. Townsend and Joan E. Gebhardt draw on the experience of the U.S. armed services. Military leadership, they write, is a matter of behavior, not position: everybody is expected to be ready to act as a leader when called to do so. When they are called to action, they are trained to focus on three priorities: achieve the mission, protect their people, and build new leaders for the next mission. Herb Kelleher, chief executive of Southwest Airlines, similarly argues that part of his competitive advantage has come from a practice of fostering leadership throughout the ranks. He seeks to ensure that all of his employees know what to do without being told how to do it, thereby enabling them to solve quickly the many customer problems that arise every day, solutions that help turn first-time flyers into repeat passengers.

Source: Leader to Leader (e-mail to subscribe: subinfo@jbp.com; e-mail for Drucker Foundation: L2L@ix.netcom.com)

Global Competition, Critical Thinking and Leadership

Wharton Executive Education is offering its five-week Advanced Management Program for senior line or functional executives on September 21-October 24, 1997, February 1-March 6, 1998, and May 31-July 3, 1998.

Information:execed@wharton.upenn.edu and http://www.wharton.upenn.edu/execed

Newsletters: The Change Manager

A quarterly newsletter published by Lance A. Berger focuses on managing organizational change. The current issue describes how CoreStates Financial Corporation, a banking institution with $45 billion in assets, uses change management as a competitive weapon. New problems, new pricing, and new products help position the bank with its customers as a leading edge provider.

The newsletter also includes an article by Richard R. Austin and Lisa A. Belsito of EDS. They argue that company leaders should foster "the art of dialogue": a culture of "advocacy and inquiry that stresses the importance of thoughtful questioning and self-restraint in making judgments." Open dialogue can be especially important during a period of change: "Organizations in the midst of business transformations, reengineerings and restructurings are applying the principles of dialogue to create environments of shared understandings -- helping employees focus on the company's goals; then to muster the energy and enthusiasm to achieve these goals."

Source:The Change Manager, Lance A. Berger and Associates, 17 Courtney Circle, Bryn Mawr, Pa. 19010

"I believe that we were put on earth for a purpose and, for me, that purpose is most simply put in the word 'connectedness.' Connectedness, first, to the power that is greater than ourselves; secondly, to purpose, which in my case, given my destiny, is a connectedness with poor people and opening up access so that poor people can change their own destinies and realize their own God-given talents."

Source: Nancy Barry, former World Bank official and now of President, Women's World Banking; from a speech at the World Bank, October 3, 1996.