Why Narcissistic CEOs Make More Money, But Are Bad for Business

A new study finds that narcissist CEOs are paid more than modest CEOs, and not because their firms perform better.

Jul 22, 2014 at 2:25PM

A new academic paper claims that CEOs who are narcissists – dominant, self-confident, entitled, grandiose, and with low empathy – are paid more than non-narcissist CEOs, amass more shares, and have a higher differential between their pay and that of their colleagues. In addition, it found that all of these traits increased over time.

Narcissistic CEOs were identified by surveying employees of the firms, and ensuring that there was wide agreement about the CEO's personality, as well as testing public documents such as letters to shareholders and earnings call transcripts to see if the CEO's use of the personal pronoun was more pronounced than in others.

The sample of companies was comprised of 32 high-tech firms and data was controlled for industry, firm size, CEO as founder/non-founder, and firm value and performance.

None of those factors could account for the higher pay of narcissistic CEOs, either singly or together.

Isn't narcissism a good thing in a CEO?

But wait, isn't narcissism exactly what you want from a CEO? In times of turmoil and change, the study concurs, perhaps it is. But not in the long term.

"Over time," the study says, "their overconfidence in assessing and portraying their own abilities, willingness to ignore objective feedback to the contrary, persistence, and willingness to manipulate others allows the narcissist to shape the perceptions of others and ultimately influence compensation systems." Large differentials between the CEO's pay and the pay of other managers creates long-term problems that ultimately affect the firm's performance. 

While it might not be surprising that narcissist CEOs end up being paid more than their non-narcissist peers and a lot more than any of the other executive team members, the damage that this can do to a company's performance in the long term is less widely understood. In any team -- executive, sales, research -- if one member is valued exceptionally higher than the other members the effect is demoralizing, leading to other team members putting in less effort than expected and potentially even working against the "star." It's like the CEO saying: "I can run this company on my own, you're just there for window dressing."

It's an easy check for any shareholder to make. Just look at the Summary Compensation Table in the company's annual proxy statement and calculate if the CEO is paid more than five times the average of the other executives, or, even worse, five times more than the next highest paid executive. Such a differential is going to lead to a lack of loyalty, and ultimately to executives leaving the company. In turn, that will lead to costly search and replacement efforts, which will disrupt management and strategy and diminish value.

Furthermore, the study warns that narcissism is not the same as charisma.

"Leaders who were seen as charismatic provided both bold and socialized (as opposed to personalized) visions for their organizations. However, narcissistic leaders tended to present a bold but also very personalized, "I-centered" vision for the future." The effects of narcissism and charisma might be similar in the short term, but narcissism can create problems over time, leading to succession planning issues and weak boards.

Again, this is an easy check for shareholders. If the earnings calls or shareholder communications are full of "I did this and I did that" rather than "We," what is going to happen when the CEO eventually steps down? No successor at all, or no successor that has been allowed to grow into the position by being given responsibilities, again leading to diminishing value. This will be made even worse if the board then starts a search for an outside "star" CEO to replace the old one. Research I have conducted indicates that such a move increases the cost of employing the CEO by 2.6 times in just the first year of employment.

And the fact is that the truly narcissistic CEO already makes well more than is good for the company or its shareholders.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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