Hiring a CEO
From the Outside
Is More Expensive
New Study Highlights
Cost of Failing to Plan
For Leader Succession
By CARI TUNA
Chief executives recruited
from outside a company earn significantly more in their first year than
those promoted from within, according to a new study.
Equilar Inc. found that external hires in 2007 and early 2008 received
median compensation of $6.6 million, 65% more than the median $4 million
for internally promoted CEOs. The compensation figure includes salary,
cash bonuses and equity incentives.
The study looked at CEOs
hired during fiscal years ended between April 30, 2007, and March 31,
2008. Its results generally agree with past research. Compensation
experts say outside hires tend to be paid more to offset the risks and
costs of leaving one company for another, including lost benefits and
The new study examined an
unusually broad set of companies -- nearly 1,300 across three major
Standard & Poor's indexes. On average, outsiders were paid more at all
companies, regardless of size.
Among the largest
companies, in the S&P 500-stock index, median compensation for outside
hires totaled $12.1 million, about 75% more than the $6.9 million for
internal hires. The disparity was even greater for small companies. In
the S&P 600 SmallCap Index, external recruits were paid a median of $3.6
million, more than twice the $1.6 million paid to internal successors.
When Avid Technology
Inc. tapped outsider Gary Greenfield as CEO in December 2007, the
Tewksbury, Mass., digital-media software maker agreed to pay him a
$900,000 annual salary and a target bonus of $900,000 or more; he also
received a $600,000 signing bonus and restricted stock and stock options
valued at $7.5 million. That is several times more than the $2.4 million
compensation of predecessor David Krall in 2006, his last full year as
Mr. Greenfield had been
CEO of GXS Inc., a closely held software maker, and an operating partner
with Francisco Partners, a private-equity firm. Avid declined to
By contrast, Randy Ramlo
is being paid less than predecessor John Rife as CEO of United Fire &
Casualty Co. The Cedar Rapids, Iowa, insurance company promoted Mr.
Ramlo to CEO from chief operating officer in May 2007. This year, it
will pay him a $350,000 salary -- 70% of Mr. Rife's $500,000 salary last
year. Mr. Rife also received a bigger bonus and more stock options last
year. Mr. Ramlo didn't receive any new stock options following his
promotion. United Fire declined to comment.
say the findings highlighted the importance of succession planning.
"It's very expensive not to keep their leadership pipelines full," says
James F. Reda, founder and managing director of New York-based James F.
Reda & Associates LLC. "Once you run out of talent and you have to go
outside, you're going to pay a premium."
Of the nearly 1,300
companies surveyed by Equilar, 136 replaced their CEOs last year,
including 38 that hired outsiders. Small companies turned outward most
often, probably because they lag behind larger organizations in
succession planning, says Tim Sparks, president of Compensia Inc., a San
Jose, Calif., compensation consultancy.
companies whose shares had performed poorly were most likely to hire
outsiders, Equilar found. Experts say these companies may have been
looking for fresh leadership. When Mr. Greenfield took over at Avid, for
example, its shares had tumbled to $25.42 from a March 2005 high of
Internally promoted CEOs
received less compensation than CEOs who had been in place for at least
two years. "It's like replacing a Hall of Famer with a rookie," Mr.
Sparks says. "You would expect that first year public company CEO to be
paid less than the person he's replacing."
Companies give large
upfront equity grants to externally recruited executives to align their
interests with those of shareholders, Mr. Sparks says. Internally
promoted CEOs usually have a well-established stake in their
organizations, he notes.
Such grants are also meant
to help retain newcomers and often come with strings attached, says
Frank Glassner of San Francisco-based Compensation Design Group Inc.
Write to Cari Tuna
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