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December, 1996, Vol. 1, No. 3
Governance, Compensation, and Performance
A new study of large, publicly-traded corporations reveals that
board structure and company ownership influence a CEO's total
compensation. With average CEO annual income near $1.2 million,
the study reports that, on average,
(1) a CEO who is also board chair receives an extra $205,000
(2) expanding the board by one person adds $47,000
(3) having a large external stockholder (>5%) subtracts $117,000
The chief executive's compensation in turn predicts the firm's
return on assets one to five years later. Net of economic factors,
CEOs that are relatively over-compensated now preside over companies
that under-perform later. If a CEO is a standard deviation higher
in pay than would otherwise be dictated by economic drivers, the
firm's annual return on assets is diminished by one percentage
point. In other words:
Firm governance => executive compensation => financial performance
Implication: A firm's governance should provide effective oversight and appraisal
of executive performance. When done well, the company is more
likely to enjoy the leadership that it needs to do well.
Source: John E. Cole, Robert W. Holthausen, and David F. Larcker, "Corporate Governance, CEO Compensation, and Firm Performance," 1996 (Accounting Department, Wharton School, University of
Pennsylvania, Philadelphia, Pennsylvania 19104-6365).
Next time: Research on 360-degree leadership feedback programs.
Lincoln on Leadership
Drawing on Abraham Lincoln's rise to the presidency and wartime
experience, Donald Phillips extracts enduring lessons for leadership
anywhere:
- Everywhere you go, at every conceivable opportunity, reaffirm,
reassert, and remind everyone of the basic principles upon which
your organization was founded.
- Call on the past, relate it to the present, and then use them
both to provide a link to the future.
At a celebration of Thomas Jefferson's birthday in 1859, Lincoln
observes:
"All honor to Jefferson -- who, in the concrete pressure of a
struggle for national independence, had the coolness, forecast,
and capacity to introduce...an abstract truth, applicable to all
men and all times."
Source: Donald T. Phillips, Lincoln on Leadership: Executive Strategies for Tough Times (New York: Warner Books, 1992).
"A nation which has forgotten the quality of courage which in
the past has been brought to public life is not as likely to insist
upon or reward that quality in its chosen leaders today -- and
in fact we have forgotten."
-- John F. Kennedy, Profiles in Courage (New York: Harper, 1956)
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