Bigger Mansions, Worse Job Performances?
What does CEO house size have to do with company stock prices?
May 9, 2007 — -- 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.
