The last few years have been peppered with stories around the growing pay disparities between those at the top and those at the bottom of our organizations.
Such disparities are fine if the people leading our organizations are worth the huge sums they're paid. Whilst there is a huge industry that is happy to proclaim our leaders as heroes capable of bending the fortunes of a company by sheer force of will, a recent study from researchers at Texas A&M University suggests their influence is actually rather marginal, with any success achieved as much down to luck as the skill of the CEO.
The CEO Effect
The researcher trawled through performance data from 1,500 of the biggest firms in America between 1993 and 2012 to try and examine just how much of that performance can realistically be attributed to the performance of the CEO.
"Differences in the performance of a firm during the tenures of different CEOs can be caused by at least two things," the author explains. "There are differences in CEO abilities as well as events that are outside of the CEO's control -- chance events."
Whilst much has been written about the things that are inside the control of the CEO, much less is known about the chance events that are outside their control.
Things like a scandal at a rival firm or a major incident with a supplier can all have significant consequences on company performance. The phenomenon of 'regression to the mean' often results in such effects cancelling each other out over time, but most CEOs are only in post for a relatively short period.
As CEOs average just four years in post, the chances of luck evening itself out in that relatively short timescale is quite low.
Lucky Success
To explore the extent that luck plays a part in CEO success, the researcher used variance decomposition, which is commonly used to understand how much of total variance in a thing can be attributed to a single variable, which in this case is the CEO.
A simulation was created whereby the level of company performance was left entirely to chance. Variance decomposition analysis was then conducted on actual company data to enable comparison with the simulated data.
The aim was to understand how big the CEO effect would be if all the performance differences between different tenures was down to chance.
Better To Be Lucky Than Smart
Amazingly, the analysis suggested that over 70% of the CEOs impact, as measured in previous studies, could be attributed to nothing more than blind luck.
It suggests that previous attempts to highlight the impact CEOs have on company performance have tended to assign performances gained by chance to the talents of the CEO.
The author believes that his findings underline the importance of giving leaders more time in post so that the results they achieve can more accurately be assigned to their talents rather than to the vagaries of chance.
"If we do not want CEOs to be rewarded or punished for luck, then understanding their true contribution to company performance should be an important part in determining the level of their compensation," he concludes.
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