It is really quite a startling finding. Chief executives, it turns out, are not that different from the rest of us. Job insecurity and high labour turnover are par for the course for the working population, but it seems it is the same for chief executives too.
According to the Harvard Business Review, chief executives are three times more likely to be sacked than they were in 1985. In the British population, 33 per cent have been in their jobs for less than two years, while for chief executives, the figure is 25 per cent.
A total of 20 per cent have had more than two, but less than five, against 36 per cent for CEOs. Just 15 per cent have lasted for between five and 10 years, against 26 per cent for CEOs.
But for those with more than 10 years in any one job, the general population outstrips CEOs by some measure: more than 30 per cent of the workforce have had more than 10 against just 13 per cent for chief executives. The average tenure for a chief executive in the top 350 quoted companies is five years and three months. In the top 100, it is just four years and one month.
Whether CEO churn, as it is called, is a healthy phenomenon depends on circumstances and whether reinvigoration or stability is required. But it is a neat reflection of stock exchange listing requirements, which say that contracts for chief executives should not exceed five years unless specifically approved by shareholders.
Tony Renton, deputy director of professional standards for the Institute of Directors, says the immense pressure on CEOs to perform was a mixture of “shareholder activism and the power of non-executive directors”. It has led to an extremely tight market for the services of good CEOs.
Even the mighty Barclay’s Bank suffered instability at the top as the story of its failure to smoothly recruit left a vacuum of uncertainty. In November 1998, Barclay’s chief executive Martin Taylor resigned amid rumours of a boardroom split. On top of his £957,000 1998-99 salary (30 per cent up on the year before) he received a £1.6m pay off and £2.3m worth of shares.
Sir Peter Middleton took over temporarily in a chairman and chief executive caretaker capacity.
In April, the bank believed it had found a successor in the form of Mike O’Neill, former head of asset management and share investing for Bank America, recruited on a £15m package over three years. But he lasted precisely one day in the job. The former US marine developed heart trouble and decided to step down – although rumours flew as to other reasons.
As a consequence, Barclay’s refused to pay executive headhunter Spencer Stuart its fee, reputed at the time to be worth £500,000, until a suitable replacement was found. That replacement did not materialise until October last year when Matt Barrett, head of the Bank of Montreal, was recruited. Sir Peter held his night watchman role for almost a year.
There is precious little research into what lies behind chief executive turnover. In what is believed to be the sole piece of relevant authoritative research in this country, careers consultancy Sanders and Sidney – together with venture capitalist 3i and the Cranfield School of Management – found that following a merger or acquisition, just under half of all senior executives earning more than £100,000 were made redundant. This is unsurprising, as there cannot seriously be two.
A further, and perhaps more surprising 20 per cent, were made redundant as a result of personality clashes or disagreements over future strategy and direction. Six out of 10 found other jobs in similar blue chip organisations, while almost a quarter left to take up portfolio careers, combining consultancy with non-executive directorships. Fifteen per cent set up their own businesses.
Researchers found that the tougher the life of the CEO, the shorter their tenure. In the top 100, 72 per cent switched their CEO in less than five years. Just seven per cent have survived more than 10 years. A total of 61 per cent of CEOs in the quoted sector have been in the role less than five years.
By contrast, 46 per cent of chief executives in the unquoted sector have held their job for less than five years and 30 per cent for more than 10 years. It seems that life is somewhat less pressured when your firm is not listed on the stock exchange, although paradoxically CEOs in the unlisted companies complained of greater stress.
The single biggest factor that affects their tenure is share price. The FTSE top 100 said they were under mounting pressure from both shareholders and the media to deliver. As one told researchers, “Those who deliver tend to stay. It is driven by shareholders; it is OK when the results are as expected but a poor year’s performance can nullify five previous good years.”
Next came age, stresses and strains of the job, change in ownership, industry consolidation and the need for a fresh approach.
And so to the question of what is likely to make them stay. Perhaps stereotypically, CEOs in the top 100 felt equity was unimportant. What drove them was innate, animal competitiveness.
Outside the top 100, equity is seen as more important. However, while their unquoted peers speak as one that an equity stake affects performance and therefore length of tenure, when it comes to the perceived best routes to the top, researchers found that to a man and woman they all believed their route was the best.
Internal appointees pointed to knowledge of culture, issues and people; external to a fresh pair of hands and objectivity. But all were unanimous that their role is becoming trickier. There was greater complexity owing to globalisation, industry consolidation, mergers and acquisitions, company restructuring and the need to manage change, demanding customers, difficulties in finding good people and keeping up with continual advances in information technology.
All felt that life is easier in the unquoted sector – in the top 100 it was clear that a private life took a back seat to the demands of work.
Sue Cheshire, managing director of the Academy for Chief Executives, believes that many boards store up problems for themselves by failing to find the right leader. Seeking stability, they attempt to recruit in the same vein as in the past all the time. Then, once they have a new chief executive in place, they fail to support them.
“The loneliness and isolation that can ensue for chief executives can be quite a shock for them – especially if they are trying to reinvigorate the culture of an organisation – as it usually means upsetting the status quo. There is often nowhere to turn,” says Cheshire.
She says the sacrifices necessary for inspiring and leading people are such that it puts an intolerable burden on many CEOs – hence the turnover figures. If it were any other figure in a workforce, the role of the HR professional attempting to minimise turnover would be clear. But when it is the chief executive – several pecks above in the pecking order – it is that much more political.
Close and trusting relationship
Yet according to Jacqueline Clarke, general manager at the international executive search practice at CSA Management Consultants, it is precisely here that a close and trusting relationship between CEO and HR director is important.
“The HR person is really the conscience of an organisation,” she says. “With people being so important to business growth, the role of chief executive is increasingly about getting buy-in and inspirational leadership. The relationship between the two must be based on achieving that holistic understanding of the business.”
The arresting figure that a fifth of chief executives leave due to personality clashes is perhaps another area where there could be a role for HR people. It is perhaps unrealistic to expect senior executives to sort out their playground spats in the manner a headteacher would approve of, rather than in the time-honoured way of fighting each other until one loses.
But Terry Bates, managing director of GHN Executive Coaching, says that it can be a cripplingly expensive way of squandering talent.
“Boards often fail to take on clashes between two assertive, aggressive people which – if left unchecked – can result in a terrible waste of resources. Instead of pussy-footing around, people need to resolve conflict and HR is the logical sounding-board.
“We need chairmen who have an awareness of the people dynamic as well as a financial aspect, because, strange as it may seem, people often need help to grasp each other’s points of view.”
Pay remains the key technique of aligning the interests of the business with those of the CEO. And here, while research may highlight that life can be tough at the top, public sympathy is likely to be muted. While executive pay as a whole may be rising by 8 per cent a year, there is an acknowledgement that there is a shortage of CEOs. And they are globally mobile, which means a significant rise in executive pay levels in the UK.
But there seems to be less consistent logic behind the pay-offs for those who leave – sometimes having failed to increase value at all – which are widely seen as far more random and voluptuous. Some CEOs are clearly worth more out of the office than in it. Jim Fifield, former president and chief executive of EMI, earned £12.42m for early termination of his contract.
Aside from red-top headlines, serious academic research has also found little evidence that pay is closely allied to performance.
Executive remuneration practice Stern Stuart, for instance, looked at the pay practices of the FTSE top 30 last year and found “effectively no correlation between performance and pay”.
The report said it found that “incentives are based on too many measures with a weak link to value creation, targets are based on negotiated budgets that are reset each year, pay out caps minimise opportunity, thresholds limit accountability and rewards have no element of risk over multiple years”.
In short, CEOs know how to look after themselves.
But there is a tendency to reflect only on the generosity of severance packages once a CEO has moved on, rather than at the time of recruitment. An organisation may have been in a difficult position to start with; not recruiting someone may have been disastrous in terms of share volatility.
Missing the point
Cliff Weight, principal in the executive compensation practice of William M Mercer, says many of the outraged headlines on executive pay-offs tend to miss the point. “The arrangements are the consequences of recruitment. When you appoint somebody you are doing a deal. They are giving up a lot to join you – their track record, reputation, and often options. They do not really know what they are going into.
“If the company fails it will be seen as their fault, so it is understandable that they want safeguards and security nets. When he or she arrives, the CEO has a lot of bargaining power and the package reflects a trade-off of the risk.”