There are certainly examples of chief executives who’ve had a big impact on a company’s success — think Alan Mulally turning around Ford amid the financial crisis — but the notion of the omnipotent, all-powerful CEO who should get all the credit or blame for a company’s fortunes is wrong, says Jim Westphal, a professor at the University of Michigan’s business school. “CEOs are attributed way too much responsibility,” he says, pointing to research on the erroneous “romance” theory of leadership.
Other research has shown — though there are dissenters — that most of a company’s performance is due to factors such as industry fluctuations, or even luck, with only a fraction attributable to the actions of an individual leader, says Michael Dorff, author of “ Indispensable and Other Myths: Why the CEO Pay Experiment Failed and How to Fix It.” “The vast majority of how a large established company does,” he says, “has nothing to do with the CEO.”
Myth No. 2
CEOs need high pay packages to motivate and retain them.
In the world of CEO compensation, the concept of “pay for performance” is dogma: Chief executives supposedly need those high potential payouts — average CEO compensation, including realized stock options, rose to $18.9 million last year, according to an analysis released Thursday by the left-leaning Economic Policy Institute — to ensure they have the same goals as investors, to keep them from jumping ship and to motivate them to spend all those hours jet-setting around the globe managing their sprawling domains. When Tesla announced a new pay package that would tie CEO Elon Musk’s compensation entirely to performance metrics, the company explained, “This ensures that Elon will continue to lead Tesla’s management over the long-term.” As one University of Chicago professor wrote in a 2013 paper, “The market for talent puts pressure on boards to reward their top people at competitive pay levels in order to both attract and retain them.”
But while the link between pay and performance for CEOs may be debated, researchers and pay reform advocates have questioned how much outsize pay is really needed to motivate chief executives. Some point to research showing that creative, complex tasks like CEOs’ are not well-suited to performance-related pay. They are already high achievers, so that super-size pay isn’t clearly needed for motivation. And the flight risk for chief executives is apparently small: Dorff points to a 2003 study that looked at about 600 large companies over 30 years, from 1969 to 1999, and found only 117 cases of a CEO of one company becoming CEO of another — fewer than four per year.
Myth No. 3
A CEO makes what's on the company's compensation table.
It pops up repeatedly in stories about CEO pay: the millions that a chief executive “took home” the previous year. For Wells Fargo CEO Tim Sloan, it was $17.5 million in 2017, according to MarketWatch. Recently retired Chevron CEO John Watson led the energy bosses, according to the Wall Street Journal, “taking home” more in 2017 than his counterparts.
But the phrase is typically shorthand for a figure that companies must report in their proxies’ “summary compensation tables” and doesn’t necessarily reflect the amount a CEO deposits in his or her bank account. The table represents the estimated “fair value” of the huge buckets of stock options and equity awards CEOs receive when they are granted; these are often multi-year awards that will be available to CEOs only over time, depending on performance and tenure. Because of those vesting schedules, and because stocks rise and fall, the listed figures can differ wildly from a CEO’s “realized” pay, especially during booming market periods. For instance, an analysis by Axios found that Netflix CEO Reed Hastings’s listed pay was $24.4 million, but what Axios called his “actual pay” for 2017 was $178.8 million. It can also work in the reverse: Broadcom CEO Hock Tan’s compensation for 2017 was listed at $103.2 million, thanks to a new stock grant that will pay out over several years, but his “actual pay,” according to Axios’s analysis, was $42.1 million.
Myth No. 4
Extroverted, charismatic leaders make the best CEOs.
The stereotype of the glad-handing, back-slapping CEO who easily works a room remains in place for a reason. Chief executives’ outgoing personalities are often cited in magazine profiles of successful business leaders. (Fortune : “Nobody’s as good at salesmanship in the world of high tech as Marc Benioff, the nimble and gregarious 6-foot-5, 290-pound co-founder and CEO of Salesforce.com.”) Some of the most iconic CEOs in history have been hailed as extroverts (Apple’s Jobs and General Electric’s Jack Welch ). An analysis of academic studies in the Journal of Applied Psychology found that extraversion is the “most consistent” predictor of “transformational leadership.”
But additional research is showing that introverts can perform just as well, if not better, at least in certain situations. Introverts can be more effective when employees are trying to be proactive — they’re more likely to listen and less likely to feel threatened. Another study has found that executives with introverted tendencies are better “servant leaders ” who focus on the needs of their teams to nurture the best performance. The consultancy ghSmart found that a little more than half of the CEOs who did better than expected in the minds of investors and board members were introverts.
Myth No. 5
A CEO's skills are a great
fit for the presidency.
The idea that government should be run more like a business is one of the most enduring beliefs among many American voters — and the understandable corollary is that more business executives should run the country. Campaigning for president in 2012, Republican nominee and former Bain Capital CEO Mitt Romney floated a voter’s idea to change the Constitution to require candidates to have three years of experience working in business in order to run for president. (Romney didn’t explicitly endorse the idea but advocated for business experience.) And former U.S. agriculture secretary Dan Glickman wrote in an op-ed in January that “we can’t let Trump’s presidency dismiss the notion that business executives can be good presidents,” because “the business world can be a remarkable platform to build skills and excel.”
But while there are certainly examples of business leaders succeeding in public office (Michael Bloomberg, for instance) — and there may yet be a CEO of a publicly traded multinational corporation who governs the country successfully — the idea that a CEO’s skills translate well to the presidency is not proven. Historians have rated presidents with the most business experience, such as Warren Harding, among the lowest, and the economy, at least in the past, has tended to perform worse under their leadership.
More critically, while the jobs may require some of the same executive management skills, they don’t play out in the same way. The presidency, it has been said, requires “endless kissing and coaxing, endless threatening and compelling,” while corporate reporting structures are more top-down. And a CEO manages the company for the benefit of its investors, while the president is supposed to govern for the public interest. As a CEO once told Los Angeles Times columnist Michael Hiltzik , even if both jobs use some of the same skills — delegating authority, managing a budget — being good at them in one domain doesn’t mean they’ll apply in the other. Nimble fingers, for instance, might be needed by both a concert violinist and a neurosurgeon, “but that doesn’t mean you’d want a violinist to perform your surgery.”
[CORRECTION: A previous version of this article misspelled the name of Los Angeles Times columnist Michael Hiltzik.]