Hiring a CEO from outside your organization is more costly than promoting an internal candidate, according to a recent study. In addition, companies that promote internal CEO candidates outperform companies that recruit external candidates.
The study, “Homegrown CEO: The Key to Superior Long-Term Financial Performance is Leadership Succession,” was released by The Kelley School of Business at Indiana University and global management consulting firm A.T. Kearney. The study identified and analyzed 36 S&P 500 non-financial companies that exclusively promoted CEOs from within their own organization over a 20-year period, from 1988 to 2007.
According to the findings, these companies outperformed other companies across seven measurable metrics: return on assets, equity and investment, revenue and earnings growth, earnings per share (EPS) growth and stock-price appreciation.
The study also found that the cost to attract external candidates is considerably higher than the cost of recruiting internal candidates. Median compensation, including salary, bonus, and equity incentives, for external CEOs is 65 percent higher than internal candidates, according to the analysis.
In addition to a higher compensation package, a majority of CEOs who were recruited from outside the company stayed with the company less than four years. Forty percent lasted less than two years.
Paul A. Laudicina, chairman and managing partner of A.T. Kearney, commented, "Boards of directors often fail when it comes to CEO succession planning. Rather than focus on leadership development and creating a qualified stable of internal CEO candidates, boards too often end up going outside the organization to fill the top spot. Unfortunately, their stakeholders more often than not pay a big price for their star search."
The entire study is available online.
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