CEOs, narcissism, and executive pay

The personality of successful CEOs takes up a significant proportion of popular and academic literature to the extent that it often overwhelms other arguably more important considerations. These include the many other attributes necessary to being a successful CEO, with higher relative intelligence being the attribute most often identified (but overlooked) in academic research.

However, once through the various gateways of intelligence, industry experience, technical knowledge, critical thinking skills, problem solving skills, communications skills and demonstrated achievement to get into the top leadership job of an ASX-listed company, some aspects of CEO personality need to be considered by every company chairman. Foremost among these is the extent that your company’s CEO may be narcissistic. This is not to say that a narcissistic CEO cannot do a good job. They can, and in fact their drive to do so is strong as only success will lead to the personal recognition they crave. But narcissism can have a downside.

The narcissistic CEO is more likely to take excessive risks, acquire companies that fail, impede the development and promotion of potential successors, accentuate the positive, and minimise the negative. In our experience, the last of these can contribute the most to catastrophic failure when massive impairments and threats of insolvency are suddenly revealed too late for the board to take remedial action.

Narcissism is characterized by a sense of self-importance, an excessive need for attention and admiration, and lack of empathy. The perception that narcissism is highly prevalent among CEOs stems from some of the common traits observed in CEOs, such as self-confidence, risk tolerance, a focus on goal achievement, and more extraverted personalities. Narcissists might share the observable attributes with confident, dynamic, or transformational leaders, but the two are not synonymous. From an external standpoint, distinguishing between narcissistic and self-confident leaders can be difficult.

There are various means to identify an excessively narcissistic CEO. The most reliable and valid involves the application of psychometric tests. This is not something CEOs volunteer for. Hence second order indications need to be relied on. For example, some studies consider disclosures whereby the CEO uses “I” rather than “we”. In fact, this is something we look for in client meetings as we gauge the likelihood there may be issues arising in providing independent board advice on CEO pay.

A quick test is seeking the input of board members rating the company’s CEO against other CEOs they have observed on various factors suggestive of narcissism. A recent US study did this across a sample of 182 non-executive directors and then compared the more narcissistic CEOs against external factors of performance (see HERE). In the sample, narcissists comprised about 18% of CEOs, compared to about 5% of the general population. This is not inconsistent with other studies, and understandable as narcissistic personalities are drawn to a public company CEO role which garners more personal recognition than many other occupations.

The study found that more narcissistic CEOs are associated with significantly lower stock-price performance in absolute terms and relative to the S&P 500. The performance for CEOs in the sample with higher narcissism has median annualised stock-price of 4% compared with median annualised stock-price performance of 27% for CEOs with lower narcissism. Relative to the S&P 500, more narcissistic CEOs underperform the benchmark by 12% annualised, compared to outperformance of 11% annualised for less narcissistic CEOs.

Interestingly, they found narcissistic CEOs oversee companies with higher ESG scores than less narcissistic CEOs using a standardised ESG rating system.

These results may seem surprising. In theory, narcissists are more strictly concerned with financial gain and as such should care less about the social benefits of ESG. However, there is evidence that narcissistic CEOs invest in ESG and corporate responsibility to garner positive media attention, in which case their dedication to ESG might be only superficial.

Another method Guerdon Associates considers to indicate excessive narcissism and hence increased difficulties in assisting boards manage pay expectations and outcomes is CEO pay data. This was reinforced by the research study that found narcissistic CEOs receive median total compensation that is 33% higher (US$10.34 million) than CEOs who are not narcissistic (US$7.79 million).

Interestingly, the researchers found that the second most highly paid executive in the company also receives significantly higher pay. This executive may be a credible individual who is loyal and provides needed admiration. We have found these are not infrequently relatively introverted, so not likely to be a threat to CEO dominance. In our work we tend to find both unusually high and unusually low second highest paid executives reporting to more narcissistic CEOs, which is at variance with this particular research study.

At this point in an article we typically like to provide a checklist for chairmen on how to manage narcissist CEOs. Such a checklist would be handy for independent remuneration advisers too, given we must provide the board the means to fend off the incessant demands for recognition with ever higher narcissistic CEO remuneration. In this regard, being fair and reasonable, with sufficient data and rigorous analysis to withstand the intellect of a CEO aspiring to more pay than peers, is part of the answer. Another part is ensuring the board is aware of the consequences of excessive pay for insufficient performance in terms of governance ratings, capital raisings, and shareholder support for remuneration and director election resolutions.

For board chairmen, similar learnings apply. Insist on rigorous data and analysis, to the extent you know you probably must dig deeper to obtain a true picture of company operations. Consider the consequences. If the CEO is becoming “indispensable” because of successor turnover, or the belief that company success cannot be achieved without the CEO, take courage, push back.

Fortunately, most boards do not face these issues. For most chairmen who are blessed with CEOs who are conscientious, recognise and promote others, and are humble, count your blessings.

© Guerdon Associates 2024
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