23 July 2014

Data Shows that CEOs are Definitely Better at Becoming CEOs

Correlation between CEO pay and company performance is weak.

This chart from Eric Chemi and Ariana Giorgi plots CEO pay ranked from low to high along with company performance, ranked low to high. If CEOs made more money as their company performed better, the dots would neatly line up into an upward slope. They don't. The dots are all over the place. Per this data set, company performance explains about 1% of CEO's pay.

CEOs inevitably make more money than anyone else in a company. There are a lot of good reasons for this but there is only one thing we can definitely say about the folks who become CEOs: they are better than other people at rising to the position of CEO.

It's not easy to become CEO. It takes a lot of talent, persistence, people skills, diligence, patience, hard work and intelligence. It's worth it though. The rewards are huge. The average pay for a Fortune 500 CEO is $12 million, about 380X what the average worker makes.

But as you can see, the talent it takes to become CEO is randomly correlated with the talent it takes to actually boost company performance. That may seem like a subtle distinction but it should matter to stockholders.


Anonymous said...

I've had the same thought about the president.

The skills that make a successful candidate- raising funds, giving speeches, and having quick, witty responses to questions- have very little to do with successfully governing after they've won the job.

Ron Davison said...

Thomas - I think you're right. There is a gap between what makes for good politics and good policy. In a good year, that gap is small; in a bad year it's huge (for some reason 2004 comes to mind).