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Management article
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Reference no. ART-1864-E
Published by: IESE Business School
Published in: "IESE Insight", 2010

Abstract

When a firm is not doing so well, and the board thinks about replacing the CEO, the first question is, ''What kind of CEO do we need?'' The answer is often the same: someone with lots of experience and a proven track record, but also, a highly charismatic figure. But how essential is it for the CEO to be charismatic? Do charismatic CEOs achieve better financial performance, which might justify the higher personal compensation they command? Be careful what you wish for, say the authors, because you might get more than you bargained for: A CEO who exudes charm, but turns out to be a dud. The corporate world is full of overpaid, underperforming executives, like Ken Lay, one of the CEOs included in a study by Henry L Tosi, which examined the relationships among charisma, compensation and firm performance in a sample of Fortune 500 companies in 26 industries over a 10-year period. While revealing that there may sometimes be a place for a charismatic CEO when the firm is operating in a more turbulent environment, in general, boards and compensation committees would be well advised to see through the charm offensive and stick with measuring business performance.

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Abstract

When a firm is not doing so well, and the board thinks about replacing the CEO, the first question is, ''What kind of CEO do we need?'' The answer is often the same: someone with lots of experience and a proven track record, but also, a highly charismatic figure. But how essential is it for the CEO to be charismatic? Do charismatic CEOs achieve better financial performance, which might justify the higher personal compensation they command? Be careful what you wish for, say the authors, because you might get more than you bargained for: A CEO who exudes charm, but turns out to be a dud. The corporate world is full of overpaid, underperforming executives, like Ken Lay, one of the CEOs included in a study by Henry L Tosi, which examined the relationships among charisma, compensation and firm performance in a sample of Fortune 500 companies in 26 industries over a 10-year period. While revealing that there may sometimes be a place for a charismatic CEO when the firm is operating in a more turbulent environment, in general, boards and compensation committees would be well advised to see through the charm offensive and stick with measuring business performance.

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