CEO accounts for one fourth of a firm’s profit: Study

New York, May 21:

The chief executives today typically account for a little more than a fourth of a firm’s overall profit, new research has determined.

Pic Courtesy:
Pic Courtesy:

The study that measured what the researcher calls “the CEO effect” — or the percentage of a firm’s profits that comes from top-level decisions — found that contributions of top managers have changed over the years.

“We can place the CEO effect at about 25 percent today. But in the 1950s and 60s, it was a lot less — about six to eight percent,” said researcher Tim Quigley, assistant professor of management at the University of Georgia in the US.

So, why has the effect jumped recently?

“For me there are two major drivers. The first reason I think CEOs matter more today is that they have more levers and buttons to play with in the company than they did 50 or 60 years ago,” Quigley said.

“In the 1950s if a CEO decided they wanted to outsource their firm’s customer service function to India, they couldn’t even imagine that.

“The technology wasn’t there. You couldn’t do it. Today, they could think about it this week and have it in place next week,” Quigley explained.

The other big driver is their incentive to do so, the study noted.
The compensation packages and tax structure today provide gross incentives for these CEOs to make lots of choices, Quigley noted.

The study is forthcoming in Strategic Management Journal. (IANS)

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