Part 6: Be CEO

“In 2014, just before the Google acquisition, Nest spent around $250,000 per employee per year. That included decent office space, good health insurance, the occasional free lunch, and fun perks from time to time.

After we were acquired, that number shot up to $475,000 per person. Some of the increase was due to corporate red tape and increased salaries and benefits, but a lot of it was the added perks of free buses, free breakfast, lunch and dinner, tons of junk food, gleaming conference rooms with full A/V setups, and new office buildings. Even IT was expensive. It cost $10,000 per year to connect each employee’s computer to the Google Network and that didn’t even include the price of the laptop.

First, senior leaders often have much of their emotional equity invested in the past. The average age of an S&P 500 CEO is currently fifty-eight, up three years since 2008. Average tenure is eleven years, the longest since 2002. While veteran leaders may have the benefit of experience, they’re weighed down by legacy beliefs. Many of their assumptions about customers, technology, and the competitive environment were forged years or decades earlier, and reflect a world that no longer exists.

In 1965, chief executives in the top 350 U.S. firms took home roughly twenty times the pay of an “average worker.” By 1980, CEOs in the same top bracket of firms took home thirty times the annual salary of an average worker, and by 2015, that number had surged to just shy of three hundred times. Adjusted for inflation, most U.S. workers gained a modest 11.7 percent rise in real wages between 1978 and 2016, while CEOs typically enjoyed a 937 percent increase in remuneration.

3. Calibration

Recall that our CEO Life Cycle analysis found that three out of four (73 percent) CEOs with a successful start that beat the market in year one did worse in year two. On average, the dip in TSR was a whopping 21 percent, underscoring that a slump should be taken very seriously. That said, it’s also important to keep a clear head about why share price is being battered. Often, the slide— as with the honeymoon spike— is a market overreaction. Analysts and investors often overshoot in punishing shares, mainly due to sentiment rather than the facts of performance and company initiatives being undertaken.

In a 2019 survey of 222 CEOs of companies around the globe, 76 percent reported that there was not a leader within the company who was ready to take over their role, and 60 percent said that their company lacked a succession plan. A 2021 study by Stanford researchers found additional evidence of the lack of preparedness, revealing that 22 percent of CEO appointments from 2017 to 2021 were interim— effectively placeholders while boards searched for a permanent successor. In another 10 percent of cases in which the departure of the CEO was announced, the board didn’t even have a good interim candidate to appoint. The transition was delayed considerably while the board searched for a successor.

Inadequate succession planning comes at great expense. A study of CEO transitions at the world’s 2,500 largest public companies determined that the average cost in shareholder value of a poor succession decision— defined as needing to fire the CEO— was $1.8 billion per company. The cumulative value destruction is staggering. Researchers who evaluated the total annual cost of poor CEO transition by the S&P 1500 estimated it comes to nearly $1 trillion. Insufficient onboarding support for new CEOs alone amounted to missed opportunities of $109 billion in value creation.