External CEO hires cost shareholders more than an internal promotion
10/10/2022
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One of the board’s duties is to plan for and recruit the successor to the CEO. An internal candidate is familiar with the company’s operations and strategy, and has already established relationships with the executive team. An external candidate brings outside knowledge and industry practice, a fresh perspective, and often an established track record in a CEO position. However, an external hire comes at an additional cost.

Guerdon Associates has conducted research into ASX 300 CEO appointments from June 2020 to June 2022.

Table 1 shows the total number of internal and external candidates appointed to CEO positions in ASX 300 companies over the two years.

Table 1: Number of internal and external ASX 300 CEO appointments

 

Number of CEO appointments

Source of new CEO 

June 2020 to June 2021

June 2021 to June 2022

Total

Internal Candidates 

15

7

22

External Candidates

8

19

27

Total

23

26

49

 

Over June 2020 to June 2021, the number of internal CEO appointments was almost double the number of external CEO appointments. The opposite is true for June 2021 to 2022, with more than double the number of external hires compared to internal hires. This may be partly due to COVID-19 uncertainty and candidates hesitant to move companies.

Table 2 shows the new CEOs’ total fixed remuneration (TFR) as a percentage of the previous CEOs’ TFR.

Table 2: New CEO TFR as a percentage of previous CEO TFR by type of candidate

 

New CEO TFR as a % of Previous CEO TFR

Statistic

Internal Candidates

External Candidates

Average

84%

97%

25th Percentile

76%

80%

50th Percentile

84%

93%

75th Percentile

94%

104%

 

The data shows a premium TFR is required for external hires compared to internal promotions. Interestingly, most external hires come at less cost than the previous CEO.

A higher TFR also generally flows into higher incentive opportunities and costs to the company. This does include any additional buy-out to compensate external hires for forgone incentives.

© Guerdon Associates 2022
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