Better Fortune Magazine Rankings Are Good for CEOs

Chief executive officers receive higher compensation, are less likely to be fired and are more likely to engage in more and bigger acquisitions after their company’s ranking goes up in Fortune.

An improved Fortune’s America’s Most Admired Companies ranking helps CEOs. Chief executive officers of such companies receive higher compensation, are less likely to be fired and are more likely to engage in more and bigger acquisitions. In contrast, a decline in rank results, on average, in lower compensation, less job security and fewer acquisitions. These findings are based on an analysis of companies making the magazine’s annual list between 1992 and 2012.

The median increase in compensation for CEOs whose firms experienced an improvement in rank was $390,000. Slightly more than 60% of the CEOs of such companies saw their compensation increase. In contrast, the median decrease in compensation for the CEOs of firms with a year-over-year decrease in rank was $250,000. Nearly 60% of the CEOs of such companies saw their compensation fall.

Incidences of “involuntary” turnover in the CEO position were identified 156 times following a change in the Fortune ranking throughout the period analyzed. About 60% of these incidences occurred in firms whose most admired rank worsened. Put another way, the likelihood of a CEO departing for involuntary reasons was 2.22% for firms with a year-over-year decrease in rank. This is above the “unconditional probability of CEO turnover in any year” of 1.91%. For firms with an improvement in rank, the likelihood of the CEO being forced out was just 1.57%.

The number and size of acquisitions was also higher for firms with a year-over-year increase in their Fortune ranking. Of the nearly 5,800 acquisitions made by firms in the year following a change in their ranking, nearly 55% were attributable to companies whose rank improved. The probability of such firms making an aquisition is higher than the average likelihood for all ranked companies. More so, firms whose ranking worsened made smaller acquisitions then companies whose rank improved.

None of this is to say shares of companies whose most admired rank falls should be avoided. Rather, the data shows that an improvement in rank should not be a reason to favor such companies.

Source: “When Is Good News Bad and Vice Versa? The Fortune Rankings of America’s Most Admired Companies,” Yingmei Cheng, Baixiao Liu, John J. McConnell and Aaron Rosenblum; Journal of Corporate Finance accepted manuscript.