Ceo's: A Downside To Being An Insider
It's been a hectic year for America's chief executives. In the first seven months of 2005, 777 CEOs left their jobs, according to Challenger, Gray & Christmas. That's 90 percent ahead of 2004's pace. To replace them, boards are turning to outsiders with increasing frequency. While inside candidate Robert Iger won the year's highest-profile CEO derby by replacing Michael Eisner at Disney, in the last year directors at Nike, HP and Boeing have each hired outsiders for the top job.
While shareholders want boards to pick the best candidate, imported talent inevitably costs more. During the book tour for his recent best seller "Winning," former General Electric chairman Jack Welch has pointed out the irony that when he chose among three GE subordinates to replace him, the two men he passed over (Bob Nardelli, now at Home Depot, and James McNerney, now at Boeing) wound up making better money than Jeff Immelt, GE's current chairman. Welch says if more companies developed future CEOs in-house, their paychecks might not be so outsized. Compensation researcher Paul Hodgson of The Corporate Library agrees that the preference for outside hires "is one of the many driving forces behind the exponential rise in CEO pay."
The numbers tell the story. Thirty-four percent of S&P 500 companies that replaced a CEO in the first half of 2005 hired an outsider, according to recruiting firm Spencer Stuart. Recent research by consultants at Pearl Meyer & Partners examined pay for CEOs hired between 2001 and 2004. They found that outside CEOs earned 24 percent more than the bosses they replaced, while insiders earned 6 percent less than the departing chief. "My experience is, most [insiders] are just so thrilled to be named CEO" that they don't push for more money, says Claude Johnston, a Pearl Meyer managing director. Don't feel bad for the underpaid insiders, though; after a few years on the job, their seven-digit pay stubs usually catch up to the external hires. At the highest rungs of corporate life, there are very few losers.
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Daniel McGinn is a national correspondent, based in Boston. He writes about management and other topics, and also helps oversee Newsweek's partnership in the Kaplan-Newsweek MBA program, which launched in late 2006.
McGinn joined Newsweek in 1992 as a summer intern. He worked in New York until 1996, when he moved to Detroit as a correspondent and bureau chief. In Detroit he covered the auto industry and other Midwest business stories. He moved to Boston in 1999. He has written cover profiles of business leaders like Bill Ford and Jack Welch, along with cover stories on topics ranging from the economy to marriage to children's television. His work as won awards from the Automotive Press Association and the National Association of Real Estate Editors, and he was twice ranked among America's 30 best young business reporters.
McGinn is a magna cum laude graduate of Boston College, and he also holds an MBA from Auburn University. His freelance writing has appeared in Wired, Inc., Fast Company and The Boston Globe Magazine. He has appeared as a guest on NBC's Today Show, NPR, CNBC and MSNBC. His first book, "HOUSE LUST: America's Obsession with our Homes," will be published by Doubleday in December 2007. A native of New Jersey, McGinn and his wife live in Massachusetts with their three children.
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