Bigger Mansions, Worse Job Performances?

CEO = rock star.

OK, it's not as bad as it was in the '80s, when even nonbusiness magazines had smiling CEOs on the cover. But I still think most of us want our CEO to have a certain amount of star quality. Call it the Trumpification of the corporate world.

Who would you rather have leading your company? Casper the friendly ghost or a genie who can make all of the company's wishes come true (even if he does have a comb-over)? Let's face it, shy and retiring just doesn't cut it when you're responsible for the livelihood of lots of people. When it comes to effective CEOs, bigger always seems better. Or does it?

Arizona State University's Crocker Liu and New York University's David Yermack have a really interesting take on rock star CEOs and how much they can cost a company. Even better is the creative way the two professors came up with to study this issue -- they compared the size of the CEO's home with corporate performance. Call it entitlement, focusing on the wrong things, an inferiority complex, short man's syndrome or a bunch of guys spending other people's money -- this study found that we all pay when the CEO literally lives in a castle.

Let's start with the numbers. In 2004, the median home price for CEOs was $2.7 million. Compare that to the median price for all homes in U.S., $195,200.

The average size of the CEO's home: 5,600 square feet. Heck, if you are a titan of industry, wouldn't you want 4.5 bathrooms? Actually I'm shocked the number isn't at least 7. If you're so darn important, how could you possibly be expected to use the same bathroom more than once a week? Come on, these are really important people. (OK, I'll attempt to reduce the sarcasm…)

But the study gets really interesting when it examines 12 percent of the S&P 500 CEOs with homes that were larger than 10,000 square feet or were on at least 10 acres of land. The companies that were run by this group of landed gentry lagged the S&P 500 by 25 percent over the three years following the home purchase.

That bears repeating. The biggest CEO houses significantly increased the odds of poor corporate performance. I'm guessing that those of you reading this article are in one of two camps right now. The first group is ready to storm the Bastille and scream about CEOs living large off the sweat and tears of the rest of us.

But I'm sure there are also readers who still believe that a big ego is a necessary part of the mix -- that these two professors are making a mansion out of a molehill. Maybe, but you may feel differently after you read this.

Approximately a third of CEOs exercised stock options and sold shares in the year before they bought a home. Consistently, the shares peaked right before the purchase. Given the brouhaha over backdating stock options, I find it fascinating that the stock prices tended to peak so consistently just before a mansion was purchased. Maybe that big house isn't something that was earned but rather something that was scammed.

Ironic isn't it. Putting a CEO in a mansion, more often than not, puts you in the poor house.

Quote of the Week

"We are what we pretend to be, so we must be careful about what we pretend to be." -- Kurt Vonnegut

Book Excerpt of the Week

"Up Is Not the Only Way" by Beverly Kaye (DB, 2001)

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