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Past performance plays minor role in CEO selection

An individual's past performance plays a minor role in headhunters' decisions concerning which candidates to put forward for CEO positions in major non-financial firms, according to new research from LSE.

Researchers of the study – published in the latest issue of Journal of General Management – conducted extensive interviews with senior individuals at ten major London-based national and international executive search firms to find out how they identify suitable candidates for CEO posts.

Rather than being selected on the basis of past performance, candidates were chosen on the basis of more observable factors such as good references, their career path – whether the person has held one or more managerial posts and has had fairly clear upward progression – and the board's anticipated approval of them, what is called ‘fitting in’.

Solving jigsawFurthermore, search firms did not generally follow up on how well their candidates eventually performed when they got their jobs.

While headhunters were found to use a variety of methods from psychometric testing to intuitive observation, none claimed to make selections on an objective basis.

Max Steuer, Reader Emeritus at the LSE Centre for Philosophy and one of the authors of the paper, said: “The executive search firms spoke to us candidly about the difficulty of determining in advance how well a person will perform as a CEO in the long run interests of a firm. Part of that is the challenge is separating an individual's performance from that of a company.

"This is not to say that headhunters do not play a valuable role. They bring more objectivity to a process that has, in the past, been dominated by ‘old boy networks’. They also bring discretion to candidates and firms, and support to boards that are making extremely important CEO appointment decisions for their companies. "

The headhunters interviewed also told the researchers that they felt many CEOs in the top firms in the UK were mediocre and that many people who did not get the job could have done it equally well. They recognised that luck played a role in who was selected – including the luck involved in being on an executive search firm's database of potential candidates in the first place.

There was almost universal agreement among the headhunters that current levels of remuneration for CEOs in the large UK non-financial firms is absurdly high. They felt there was a pressure for firms to pay the ‘going rate’ and that pay is not necessarily related to an individual’s skills or abilities.  However, all the headhunters agreed that it would be a poor strategy for a candidate to offer to do the job for less.

Professor Peter Abell, Emeritus Professor of Management at LSE and an author of the report, said: "Our interviews suggest that the high levels of pay that CEOs receive in non-financial firms is quite arbitrary and subject to ever upward drift. When we probed the headhunters about what would happen if the 'norm' was substantially cut across all firms they told us that they didn't think it would make much difference to the quality of candidates. However, while some headhunters felt that exorbitant CEO pay was socially damaging they felt that, for the firms themselves, it often was financially immaterial in the grand scheme of their businesses. The adverse effect of the high pay comes more from distorting the working relations of the board."

Head-hunter methods for CEO selection by Max Steuer, Peter Abell and Henry Wynn, Journal of General Management

Posted 25 November 2015

Photo credit: Yoel Ben-Avraham CC BY-ND 2.0