KEY CONCEPT

Charismatic CEOs come across as higher achievers, and charisma has often been thought of as a must when hiring CEOs, but a large number turn out to be overpaid and underperforming. Boards should measure performance over personality when hiring and compensating CEOs.

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IDEA SUMMARY

Charismatic CEOs tend to earn more total compensation than their industry peers with less charisma.  Are these more charismatic CEOs are actually worth the money?

Let us look at the historical trends that led to the development of this idea; the evolution of investor capitalism, the emergence of the concept of the ‘corporate saviour’,’ and the subtle shift in the language used to define the nature of business have all contributed to the notion that CEOs must be charismatic.

But we should be careful what we wish for as we gaze admiringly up at the charismatic CEO, spellbound by charm – because we might get what we ask for – a CEO overflowing with charisma, but underwhelming in performance – and one who doesn’t lead the firm forward.

This is not to say that charismatic leaders are always bad for a company. Indeed, they can be inspiring and motivating and those qualities will ultimately lead to better performance. Transformational leaders have been shown to have strong, positive effects on performance, member satisfaction and commitment. This is especially true when managing complex tasks that require greater creativity and initiative – as opposed to more routine work.

But is all that charisma really worth it? The relationships between charisma, compensation and firm performance are scrutinized in the research attached. The conclusion is a suggestion that companies need to be more cautious in their selection approach before writing a blank cheque for the most charismatic candidate.

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BUSINESS APPLICATION

It is important to highlight that this is not to say there is no room for charismatic CEOs; rather, that they may be overrated. With that in mind we can outline the following advice for boards approaching the selection and compensation of a new CEO:

• Don’t just turn over the major part of the selection process to consultants.
• Boards must do their research. Forget the charm offensive—ask, ‘how good was the candidate in his/her previous job?’
• Don’t go overboard with the initial compensation package.
• CEOs are often given important powers over the selection of board members, which doesn’t always bode well for future compensation because these powerful CEOs are the most influential actors in setting their own future compensation.
• Finally, do the right thing for shareholders. Pay CEOs for performance, not personality.

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REFERENCES

Don’t Be Seduced by Charisma. Henry L. Tosi & James van Scotter. IESE Insight Issue 7 (Fourth Quarter 2010).

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