UF Study: Charismatic CEOs More Effective... At Snaring Higher Pay

July 2, 2002

GAINESVILLE, Fla. — Chief executive officers who exude intelligence, optimism and leadership don’t necessarily help their companies perform better than less charismatic counterparts – but they do tend to draw higher salaries and better perks.

So concludes a University of Florida-led study set to be presented at the Academy of Management’s annual meeting in Denver in August. The study surveyed vice president-level managers of 59 Fortune 500 companies about their perceptions of the company CEO’s charisma – everything from confidence in the CEO’s management abilities to whether he or she made them feel optimistic about the company’s future. The study compared the resulting “charisma” score to indicators of corporate performance and cross-checked the results against the CEOs’ salaries. The conclusion: Except in times of market volatility when it proved a benefit to the company, CEO charisma is not related at all to better firm performance – but rather to higher salaries for the CEO.

“What this shows is the strength of the CEO’s personality in affecting his or her compensation,” said Henry Tosi, a management professor at the UF Warrington College of Business and the lead author of the study.

Executive compensation, including salaries, stock options and other payments, soared during the 1990s, reaching an average of $15.5 million per CEO in 2002, according to an April New York Times survey. In some widely reported cases, a CEO’s compensation continued to increase even as performance of his or her company slumped. The UF study may point to one reason for this phenomenon.

The study consisted, in part, of a survey of top managers at major companies in 26 industries, including Apple Computer, Boeing, Chevron, BellSouth and Bausch & Lomb. The survey asked respondents to rate how much they agreed or disagreed with statements about the charisma of the company CEO. Such statements included, for example, “I have complete confidence in him/her” and “gives reason to be optimistic about the future.” The researchers then compared the responses with publicly available data about each company’s performance and executive compensation.

The result revealed no correlation between the CEO’s charisma and the company’s performance as measured either by the value of the stock or return on the company’s assets, the study found. However, it did find a correlation between CEO charisma and stock value in times of market uncertainty. Charismatic CEOs in these times “are able to boost the stock price, even though there is no evidence that these firms are internally managed better, measured by return on assets,” the study says. The study further found that charismatic CEOs receive higher pay than their less charismatic counterparts.

“It’s a very neat finding,” said Don Hambrick, the Smeal Chaired Professor of Management at Penn State University. “What it says is that charisma creates appeal and dazzles even the board, but that it may not have substantive effects.”

The results of the study come at a time when CEOs are under scrutiny as a result of widely publicized accounting scandals at Global Crossing, Enron, WorldCom and other companies. Tosi said these scandals might prompt company boards to pay less attention to charisma and more attention to results, particularly as shareholder lawyers attempt to hold board members personally liable for a company’s losses.

But Tosi added that, overall, the system discourages such scrutiny, and it probably won’t last. In many cases, CEOs participate in the selection of board members, which tends to make selected members less likely to be critical. Also, he said, board members are compensated so well for serving – fees of $10,000 per day per board member for each meeting are not uncommon for major corporations – that members become reluctant to compromise their cushy arrangements by criticizing the CEO. So although board members may be a little more careful for a while, it won’t be long before the CEO’s charisma begins to rule the day again, Tosi said.

“Although this study provides good empirical evidence that board members and shareholders should try to look beyond charisma, there is always someone who will come along – some good-looking, smart-talking CEO who dazzles everyone with his brilliance,” Tosi said.

The study was co-authored by Fran Yammarino of the State University of New York at Binghamton; David Waldman of Arizona State University, and UF management graduate students Vilmos Misangyi and Angelo Fanelli.