While it is not typical for CEOs to immediately fire their direct reports as soon as they realize they might need to, it is our opinion that they should not wait. They absolutely must pull the trigger as soon as they realize they have lost confidence in the individual. Granted, decisions to terminate an employee are usually made after careful consideration and due process. However, direct reports to the CEO are not typical employees; they should have the self determination and drive to know when they are failing. This assumes the CEO has made the executive aware of their shortcomings.
We arrived at the belief of quick termination of underperforming C-suite executives after asking hundreds of CEOs what their most significant mistake business has been. Well over half of the CEOs have said their biggest mistake in business has been sticking with poor performers for too long. We have watched these mistakes lead to several negative consequences, such as decreased morale among other executive team members, lower productivity, and profitability, and in a few cases, bankruptcy.
Business Case Examples:
We were retained as a coach for a CEO who had just taken over a poorly performing PE portfolio company. On a project like this, the CEO’s success is totally dependent on the success of his direct report team. We assessed the C-suite team and identified several team members who were underperforming. There was one failing team member who was critical to the turnaround. We strongly encouraged the CEO to replace this individual as quickly as possible. Unfortunately, the Board considered the move too risky and refused to sign off on the change. Ten months later, the organization failed.
The same CEO learned from this mistake and retained again us to assess his direct report team in his next role with similar earnings performance problems. In this situation, we determined that the entire team needed to be turned over. The CEO did not wait. In six months, the CEO recruited an entirely new team. In 30 months, this new team drove performance that allowed the PE firm to exit two and a half years ahead of schedule at 12X initial investment.
Another CEO of a portfolio company obtained a new direct report through an acquisition. This new executive was making the CEO’s life miserable and impacting the morale of the entire executive team. When we suggested immediately terminating the obnoxious executive, the CEO was reluctant because of the individual’s relationship with a few key customers. We suggested putting a plan in place to hold onto the customers while exiting the direct report. The morning after firing the individual, the CEO called me and said this was the first time he had looked forward to going to work since the acquisition. The company did not lose one account because of the change.
We can recount many similar instances where CEOs failed to act on poor performers quickly enough, and it ended up costing the company millions of dollars. CEOs often quote the reason for sticking with the failing executive because the risk of causing collateral damage to critical projects or customer relationships is more tangible than the hidden cost of an executive’s failures. We are sure that when the forensics of the failure is completed, the hidden cost will far outweigh the tangible cost.
It is important to remember that making mistakes is a natural part of the learning process, and CEOs who reflect on their mistakes and learn from them are more likely to be successful in the long run. We have witnessed CEOs who have learned from their mistake of sticking with failing executives too long move swiftly when the next situation arises. Even if the severance payout is over a million dollars.