It pays to promote CEOs from within: report

A study of S&P 500 non-financial companies over 20 years (1988-2007) shows that businesses that exclusively promote CEOs from within the organisation outperform companies that recruit CEOs from outside the organisation.

In the international study, 36 companies with CEOs promoted within the company outperformed others across seven measurable metrics: return on assets, equity and investment, revenue and earnings growth, earnings per share (EPS) growth and stock-price appreciation, according to management consultancy AT Kearney.

"Middle East (West Asia) companies, boards and company owners very often end up going outside the organisation to fill the CEO top spot. As organisations mature, it is becoming increasingly important to focus on leadership development and creating a pool of internal qualified candidates," said Dan Starta, Partner and Managing Director, AT Kearney, West Asia.

"Unfortunately, the stakeholders more often than not pay a big price for this star search. Companies in the region could benefit by an increased focus on CEO and leadership succession planning within an overall talent management strategy," he said.

The study, 'Homegrown CEO: The Key to Superior Long-Term Financial Performance is Leadership Succession', was recently released by The Kelley School of Business at Indiana University and global management consulting firm AT Kearney.

The 36 companies identified in the study represent 25 different industries and include international names such as Abbott Laboratories, Caterpillar, Colgate-Palmolive, DuPont, Exxon, FedEx, Honda, Johnson Controls, McDonald's, Microsoft, Nike and United Technologies, among others.

According to AT Kearney, outsiders experience a significantly higher failure rate and a much shorter tenure than CEOs recruited from inside. Recruiting at the top is also often far more risky, costly and disruptive than seeding succession from within.

While sometimes the situation requires the unique skills that an external CEO brings, external CEO candidates often are significantly more costly to attract than homegrown, internal candidates.

Median compensation -- salary, bonus, and equity incentives -- for external CEOs is 65% higher than for those promoted from within.

Moreover, 40% of CEOs recruited from outside last two years or less and almost two-thirds are gone before their fourth anniversary.