The Costs of CEO Failure

According to Challenger, Gray & Christmas, the number of CEO departures in the U.S. between 2005 and 2007 averaged almost twice that of the preceding three years. By mid-year 2008, this rate was again on the increase.

December 12 2008 by Nat Stoddard And Claire Wyckoff


 

During the last half of the 1990s, turnover rates of CEOs of major North American corporations were consistently in the 10 percent to 11 percent range or lower. In the first seven years of this millennium, however, average turnover jumped to 14 percent-an increase of nearly 50 percent.

According to Challenger, Gray & Christmas, the number of CEO departures in the U.S. between 2005 and 2007 averaged almost twice that of the preceding three years. By mid-year 2008, this rate was again on the increase. And among global companies, CEO departures escalated a whopping 41 percent in the first three quarters of 2007 over the same period of 2006.

This trend poses a serious challenge to U.S. businesses and nonprofits for several reasons, not the least of which is what it’s costing them. The impact of any change in leadership on both the company and the individual are huge. We are all aware of the exceptional severance packages provided to some notable CEOs like Bob Nardelli from Home Depot ($210 million), Hank McKinnell from Pfizer ($123 million), Gary Forsee from Sprint ($40 million), Carly Fiorina from Hewlett-Packard (a mere $23 million) and Richard Grasso from the New York Stock Exchange ($188 million)1.

Our experience with hundreds of senior-level executives’ severance provisions is less sensational than the extremes mentioned above and more reflective of norms that fail to make the headlines2. In 2007 our compensation experts informed us that the average total cash compensation (including bonuses) for large-cap company CEOs (revenues greater than $4.5 billion) was $1,650,000.

Paul Hodgson, senior research associate at The Corporate Library, puts the customary severance that most companies pay a departing CEO equal to approximately three years’ total compensation. Using that multiplier, their severance would be around $5 million.3 (This being the case, however, Martin Sullivan’s current $11 million compensation would still convert to a severance of at least $33 million and John Thain’s $16 million would translate into a minimum of $48 million.)

It has also been our experience that most CEOs of mid-cap or smaller corporations receive lesser severance packages-two years is more common at the mid-size companies and one seems to be the rule at smaller firms. Using average total compensation figures for these groups, the average severance payments would be closer to $1.7 million and $650,000 respectively.