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Lead Your Team Managing

Choosing the Right CEO Matters More Than Ever

Choosing the Right CEO Matters More Than Ever
Credit: Nivens/Shutterstock

The person you choose to run your company is more important then ever, new research finds.

CEOs have a greater effect on company performance than at anytime in the last 65 years, according to a study from the University of Georgia Terry College of Business.

Tim Quigley, the study's author and an assistant professor of management at UGA, has created ways to measure the percentage of a firm's profits that come from top-level decisions. He discovered that the CEOs impact on profits, which he terms the "CEO effect," has more than tripled since the 1950s.

"We can place the CEO effect at about 25 percent today, which means that the chief executives typically account for a little more than a fourth of a firm's overall profit," Quigley said in a statement. "But in the 1950s and '60s, it was a lot less -- about 6 to 8 percent."

To calculate the CEO effect, Quigley tracks general economic conditions over time, differences between industries, and the track record of each business. After accounting for the discrepancy explained by these factors, he can then measure the CEO's impact on company performance.

Researchers attribute the increase in CEO impact to two main factors. The first is that company leaders now have much more technology at their disposal then ever before. [Why Narcissists Make Good CEOs ]

For example, in the 1950s if a CEO decided they wanted to outsource their company's customer service overseas, they couldn't even imagine that because the technology wasn't there, Quigley said.

"You couldn't do it," he said. "Today, they could think about it this week and have it in place next week."

The other main drivers of CEO impact are that they have bigger incentives to be successful and to not rest on their laurels.

Quigley said the current compensation packages and tax structure provide a huge motivation for CEOs to make lots of choices in an effort to boost company performance.

"They're told that the status quo isn't good enough," Quigley said. "If the company made $1 billion in revenue, we want $1.2 billion next year."

In the 1950s, company leaders could get away with riding the momentum of their previous success, Quigley said.

"But today lying still, even with good performance, just isn't an option," he said. "Shareholders, the board, the media ask, 'What have you done for me lately?'"

To prove his point, Quigley points to John Chambers, Cisco's chief executive, who announced this month his plan to step aside later this summer. Despite Chambers' success in delivering a return on assets that beat his industry average in nearly every year of his 20-year run as the company CEO, many are calling for his successor to reignite the company's growth, Quigley said.

"This expectation is most certainly baked into the incentives in (his successor) Mr. (Chuck) Robbins' contract and he will certainly dial up numerous changes in an attempt to meet these expectations," Quigley said. "This scenario drives up the CEO effect."

The study revealed, however, that just because the CEO has a larger impact than ever, doesn't mean that they are performing better than ever. Previous research shows that about half of CEOs perform below average.

The current research found that just because the CEO's impact may be larger now does not mean that the average business is performing better, only that more of it's performance – good or bad – is attributable to the CEO.

The study is scheduled to be published in the June issue Strategic Management Journal.

Chad  Brooks
Chad Brooks

Chad Brooks is a Chicago-based freelance writer who has nearly 15 years experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.

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