What is a Chief Executive Officer (CEO)?
A chief executive officer (CEO) is the highest-ranking executive in a company, and their primary responsibilities include making major corporate decisions, managing the overall operations and resources of a company, acting as the main point of communication between the board of directors and corporate operations, and being the public face of the company. A CEO often has a position on the board; in some cases, they are even the chair.
There are various other titles for CEOs, including managing director, president, and executive. The role of a CEO varies from one company to another depending on the company's size and overall structure. In relatively small companies, the CEO often has a much more hands-on role in the company, making most of the business decisions, including lower-level ones, such as the hiring of staff. However, in larger companies, the CEO typically deals with only the higher-level company strategy and directing its overall growth, as most other tasks are delegated to other managers or various departments.
What CEOs Actually Do
Breaking Down Chief Executive Officer (CEO)
CEOs set the tone and the vision for their organization, and as a result, the CEOs of large corporations sometimes rise to levels of fame. For example, Mark Zuckerberg, the CEO of Facebook Inc.(FB), is a household name. Similarly, Steve Jobs, founder and CEO of Apple, became so notorious for his role in the company that, after his death in 2011, numerous films and documentaries were made about him.
Positions Related to CEO
The Difference Between CEO and Chairman of the Board
While the CEO directs the operational aspects of a company, the board oversees the company as a whole, and the leader of the board is called the chairman. The board has the power to overrule the CEO's decisions, but the chairman of the board does not have the power to overrule the board. Instead, the chairman is considered a peer with the other members of the board. In some cases, the CEO and the chairman of the board can be the same person, but many companies split these roles between two people.
The Difference Between CEO and CFO
The CFO is the chief financial officer of a company. While CEOs manage general operations, CFOs focus their attention specifically on financial matters. A CFO analyzes a company's financial strengths and makes recommendations to improve financial weaknesses. The CFO also tracks cash flow and takes care of a company's financial planning, such as investments and capital structures.
Why are COO and CEO Different Roles?
When it comes to executive-level positions within an organization, assigned titles and the roles associated with each can become muddled quickly. For small organizations or those that are still in the startup or growth phases, the chief executive officer (CEO) may also be serving as the chief financial officer (CFO) and the chief operating officer (COO), which leads to a lack of clarity and an overworked executive. Even though it may seem easier or more cost-effective to assign multiple titles to a single executive-level individual, this can wreak havoc on the continuity of the business and may ultimately negatively affect its long-term profitability. In short, the COO’s main responsibilities are to manage the company’s day-to-day operations, monitor the company’s metrics - such as production quotas - and set goals for the company.
How does a Change in CEO Impact Stock Price?
A change in stock price when a new CEO takes over a company can occur due to numerous factors, and many of these factors are based on the market perception of how capable the new CEO is of taking the company forward. Regardless of whether the change is planned or the result of unexpected circumstances, the way the stock performs partly reflects how the company manages the transition.
A change in CEO carries more downside risk than upside, and there is even more risk when the transition is unplanned. This is due to the possibility that the new CEO may shift corporate strategy for the worse. The management of the transition and the agenda set by the new CEO are important factors for investors to consider when investing in a stock undergoing a management change.
Investors tend to be more comfortable with new CEOs who are already familiar with the dynamics of the industry in which the company operates and the specific challenges the company may be facing.
Reputation is also an important factor, particularly as investors assess the CEO’s track record for creating shareholder value. This pedigree could be reflected in a number of areas, including an ability to grow market share, reduce costs or expand into new growth markets.
Despite initial investor concerns, there is no positive correlation between how the stock performs on the day the new CEO is announced and how it performs from that point forward.
What is the Path to Becoming a CEO?
While chief executives aren't required to attend college, very few people make it to the top of the corporate ladder these days without some form of formal education. In fact, it is estimated that 97% of S&P 500 CEOs have a bachelor's degree. Why is having a formal education so important? There is no simple answer to that question; however, completing university courses does provide one with exposure to a number of disciplines and causes a person to think, interact and share ideas with others, which are valuable experiences for a CEO to have. A degree from an Ivy League school or another top-tier institution is sometimes given even more credence because of the competitiveness that often accompanies such programs. While many CEOs have an MBA, there is a growing trend for top CEOs have a degree in other disciplines, especially engineering. In fact, the Harvard Business Review revealed in 2018 that, for the second year in a row, more of the top 100 CEOs had an engineering degree - 34 - than an MBA - 32.
Moreover, some well-known chief executives dropped out of or never went to college, including Richard Branson, founder and CEO of Virgin Group Ltd.; Michael Dell, founder and CEO of Dell Computer (DELL); and Bill Gates, co-founder and former CEO and Chairman of Microsoft Corp. (MSFT).
CEO Personality Traits
Having a degree from an elite school and an exceptional knowledge of the industry in which the company operates are excellent credentials to have. However, those qualities in and of themselves don't guarantee that a person will make it to the top of the corporate ladder. Personality traits may also play a role in an individual's ability to attain chief executive status.
Typically, CEOs are:
- Expert communicators, deal makers, and managers
- Extroverts who are eager to go out on the road and tell their company's story
- Individuals who are able and willing to present a cohesive vision and strategy to employees
- Individuals who are decisive, adaptable and forward-looking.
Generally speaking, a person must have extensive experience in the company's field to become CEO. A CEO's job is to provide vision and a course for the company to navigate, which is difficult to do without extensive experience and a working knowledge of the potential risks and opportunities that lie ahead for the enterprise.
Prior senior-level managerial experience is also generally a must. After all, how can an individual be expected to run a multi-million—or multi-billion-dollar—company with hundreds or thousands of employees unless he or she has previous experience managing other employees? A great example of someone who worked his way up the ranks is Jack Welch. Welch joined General Electric in 1960 as an engineer and worked his way up to vice president and vice chairman before becoming CEO in 1981. By the time he became CEO, he knew the company and the landscape well. He had also previously held a high-level position.
Then there's Andrea Jung, former CEO and Chairwoman of Avon Products (NYSE:AVP)—and the first woman to hold that title in the company's history. Jung has a sizable amount of experience in retail. After graduating from Princeton, she worked for Bloomingdales, where she was part of the management trainee program. From there, she also worked at Neiman Marcus, another high-end retailer, where she served as executive vice president. When she finally came to Avon, she started as a consultant and then moved up to chief operating officer (COO) before finally landing the position of CEO.
Why are CEO Salaries So High?
In 2017, the highest paid CEO, Hock Tan of Broadcom, earned $103.2 million in salary and stock grants. According to Equilar's CEO Pay Ratio Study, released in 2018, the media CEO pay ratio to employees was 140:1. Warren Buffett is among the lowest paid CEO's, who earns an annual salary of $100,000, but likely earns millions more in stock and investment gains.
Certainly, there is a big disparity between CEO pay and the pay of other workers in corporate America, but is there any reason this disparity exists? Some companies believe that by awarding a large part of an executive’s compensation in the form of stock grants, they are providing an incentive for him or her to run the company well and personally benefit, as well as reward shareholders.
Another factor that companies cite for excessive pay is that some CEOs are indispensable and almost inextricable from the companies they lead. For instance, Steve Jobs will forever be linked to Apple, Inc. (AAPL) as the man who led the company as it introduced many of its major innovations and established it as a major force in the market. Thus, the name Jobs is synonymous with innovation.
Additionally, the pay of public company CEOs is normally set by a compensation committee formed of members of its board of directors, who tend to be nominated for their directorship by company CEOs. Therefore, the members of these compensation committees tend to be the cronies of the CEOs whose pay they set. Naturally enough, they tend to go along with high CEO pay levels as they enjoy the benefits of their own director positions. Moreover, the use of peer groups to determine CEO pay has also been cited as a factor for burgeoning CEO pay.
For the average worker, the term "benefits package" usually brings to mind cash compensation, which may include salary, bonuses, and stock options. However, once one ascends to the executive ranks, the packages change substantially.
Below are some of the perks CEOs typically enjoy:
Financial Counseling and Tax Preparation
Due to the complex nature of their compensation packages, chief executives are often provided with tax preparation services paid for by their employer. For example, Occidental Petroleum Corp. (NYSE: OXY) paid over $400,000 in 2008 for professional services to handle former CEO Ray Irani's financial issues.
Many firms recognize that their CEOs need protection, which may come in the form of personal security details and home security monitoring services. That said, the overall trend in spending on CEO security has been declining in recent years.
The executive suite often comes with the freedom to select executive décor, and the company foots the bill for each executive's fancy furniture. Former Merrill Lynch CEO John Thain made headlines in 2008 for adorning his office with more than $1 million worth of pricey furnishings.
Cars and Drivers
Despite the media attention paid to corporate jet travel, many CEOs are provided with ground transportation perks, including company cars, privileged parking and/or a car and driver.
Since the global recession, CEOs' exuberant spending on air travel has been highly criticized; however, top CEOs still expense their airfare costs. Bank of America CEO Brian Moynihan made headlines in 2013 for spending just under half a million dollars ($448,251) on aircraft costs.
Country Club Fee Reimbursement
Overall, instances of this long-standing perk appear to be dwindling. However, some companies still foot the bill for such social and leisurely activities. One commonly provided excuse for footing country club fees is that consorting with fellow executives can help build business and new business relationships. In 2008, Mattel Inc.(Nasdaq: MAT) paid an estimated $150,000 initiation fee for CEO Robert Eckert.
Gifts for the Road
By way of retirement benefits and pensions, some CEOs manage to collect bigger paychecks after their jobs are done. In 2009, Former Cigna CEO Edward Hanway departed the company with a retirement package reportedly worth over $110 million. Jack Welch, formerly of General Electric (NYSE: GE), made headlines due to the retirement package he negotiated before leaving the company. Welch left GE with a plan paying $8 million per year and maintained access to all of the perks on this list except country club fees. Welch eventually relinquished the bulk of the perks after details were revealed and met with considerable criticism.
Special treatment and privileges are often reserved for high-level employees and members of any organization. While public disdain may have caused some companies to scale back executive compensation in recent years, CEO perks remain in a class of their own.