Past performance is no guarantee of future performance
No one works in a vacuum. Your new star’s successes may be the result of the strengths of their previous employer’s products and services, the abilities of their colleagues, or indeed, sheer luck.
Dr Jenny Chu, a lecturer in accounting at CJBS, says her research has revealed the tendency of some CEOs to claim credit when their company does well, but to blame poor performance on factors beyond their control.
And Dr Pedro Saffi, lecturer in finance at CJBS, adds: “There’s always a danger that we exaggerate the importance of a single individual. A CEO will hopefully pick and lead a great management team, but maybe they were just in the right place at the right time.”
Compensation packages offered to star performers may encourage riskier behaviour
“Star CEOs seeking to get the most out of their share options may make reckless decisions, possibly even extending to initiating damaging corporate activity,” says Professor Raghuavendra Rau, Sir Evelyn de Rothschild Professor of Finance at CJBS.
“Traders or salespeople chasing a target-based bonus may take unnecessary risks or resort to illicit methods. If compensation depends upon company performance this may also make it more likely a company will end up hiring a CEO who is more likely to take bigger risks, because more risk-averse individuals will reject the offer.
“But if there are big rewards on offer should the company perform well, but not much downside risk for the individual should things go badly, they may feel they have little to lose when taking big risks.”
In either case, the nature of their compensation may tempt individuals to focus on short-term gains rather than the long-term health of the company.
A star performer earning much more than their colleagues can create problems
Clearly, if one individual earns far more than their colleagues this can
have a negative effect on collective morale. But Dr Chu has identified a
potentially much more dangerous phenomenon in her research: a CEO paid
disproportionately more than other C-suite executives may be more likely
to commit fraud. In these cases, the fraud may last longer and take
longer to discover, in part because the CEO is in a good position to