Wednesday, May 22, 2013

Optimal CEO Tenure and Clever Incentives

I just stumbled into an interesting short research finding in HBR of March 2013 "Long CEO Tenure Can Hurt Performance". Professor Xueming Luo, Vamsi K, Kanuri and Michelle Andrews report results from a study they did among 356 US companies between 2000 to 2010 analyzing the correlation between CEO tenure (length of time serving) and total shareholder returns.

The researchers found that CEOs create most shareholder value in their first years and argue this is mainly due to 2 factors:
- The firm-employee dynamic - This keeps improving the longer a CEO serves, growing shareholder value.
- The firm-customer dynamic - This strengthens only for a time but then it weakens.

The optimal length of tenure reported (for this group of companies in this period) was 4.8 years...

Boards of Directors are advised to keep a close eye on the amount of time and energy a long-tenured CEO spends on the firm-client relationship and focus incentives plans for such CEOs on consumer and market information and results. This will help to keep them focused on learning on client/market characteristics.