What Does It Cost to Replace a CEO?

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1:33Bloomberg Audio Studios. Podcasts. Radio. News. If you've been anywhere on the internet recently, you've probably seen the same viral video I have. It's a close-up of a man and a woman embracing up on the Jumbotron at a Coldplay concert. When they find out they're on screen, they panic. Either they're having an affair or there's a strange show. It was an awkward moment. Once the clip started gaining traction online, internet sleuths discovered it was, in fact, an affair. And they also discovered another awkward wrinkle. The woman in the video was the chief people officer at a data technology company called Astronomer.

2:18And the man in the video was Astronomer's CEO. Well, after that video blew up, the former CEO. Just days later, the board accepted the CEO's resignation and installed an interim chief. In light of the amazingly unique and wild circumstances of him being caught with his HR chief at the Coldplay concert, he was summarily dismissed. Matthew Boyle, Bloomberg's management and work reporter, says the astronomer leader's ouster might be uniquely dramatic, But it's just the latest in a series of CEO departures, terminations and resignations that Bloomberg has been tracking. Last year saw a record number of CEOs who not just departed big public U.S.

3:06companies, but by our determination and the determination of an outside expert were ousted, were essentially forced out. Matthew's team spoke with academics, corporate lawyers, executive search advisors and public relations experts and partnered with compensation consulting firm Fariant Advisors to analyze CEO departures at some of the world's biggest companies. There were 134 force outs in 2024, including some very big companies we all know. Nike was one. Just do it. The world's largest athletic clothing company is doing a leadership change. Starbucks was another. Starbucks shook the restaurant industry by replacing CEO Laxman Narasimhan with Brian Nickel.

3:50Intel. CEO of Intel is out. Petco, Victoria's Secret, Peloton. These were all companies that decided that they were not happy with their current CEO. And the question I was seeking to answer was, what does this cost? The answer? A whole lot. Faryant found that to force out these CEOs, companies paid a median of$3.1 million in cash. And for companies paying equity, a median of$6.2 million. What does this cost to get rid of the CEO you don't like? What does it cost to recruit the new savior CEO who you really do want? What about the lawyers and the PR people? And what about the search firms that look for the new CEO?

4:35What happens even to employee productivity? For Astronomer, it's hard to tally the true cost of the CEO's departure, in part because the company is private. But its damage control campaign can't have been cheap. Hi, I'm Gwyneth Paltrow. The company hired a crisis PR firm and put out a video starring Gwyneth Paltrow, who just happens to be the ex-wife of Coldplay frontman Chris Martin. Thank you for your interest in Astronomer. We reached out to Paltrow's representatives and her company Goop to find out what she made for the ad spot. As of this recording, we haven't heard back. But her biographer told Us Weekly that she was likely paid millions based on previous appearances.

5:17Millions for a one-minute ad. I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, why it's so expensive to replace a CEO, and how those costs trickle down to the rest of us.

5:38It probably won't surprise you to hear that American CEOs get paid a lot. Last year, median compensation for the 100 highest-paid CEOs at public companies was nearly$31 million, according to the pay consultant, Equilar. The high pay also comes with higher pressure to perform. And Bloomberg's management and work reporter, Matthew Boyle, says last year, a surprising number of CEOs were shown the exit. 2024 was a record figure. And is that because there is more scrutiny on CEOs these days, not just around maybe performance, but around, you know, what they're saying on perhaps other issues? I think there's also been a rush of CEOs to either leave voluntarily or involuntarily because during COVID, a lot of CEOs stuck around just saying, I'm just going to get our company through COVID.

6:33Let's just get through COVID. And now it's time to hang it up. Or they got their company through COVID and now they look at Trump 2.0 and they say, oh, my goodness, I can't handle this as well. But also a lot of these are just performance issues. I mean, they are underperforming. They were either chosen poorly or they were not the right person at the right time. And so when we saw that number, 134, we said, my goodness, we need to take a look at what's going on here. And 2025, the current year, we're also on pace for a new record as well in terms of the number of CEOs ousted. Already? Yes, already through the half year.

7:05So it could be another record year, actually. Wow. Let's start to break down some of the costs that you dug into. First, there's the cost of just getting rid of someone for cause, not for cause. How are those kinds of payments structured? Usually it's a set of payments where sometimes they will pay their salary for the remainder of the year, even for an additional year. There's usually some type of cash bonus. So let's say he was there for half of the fiscal year and then was terminated. He might still get a bonus for that year, which makes you kind of scratch your head. Wait, you fired him? Why is he or she getting a bonus?

7:44A prorated bonus is kind of crazy. Yeah. Again, rules are different for CEOs. So they're going to get some type of prorated bonus for the current year. But then where it gets really interesting and the numbers start to get really bigger is the equity. These could be in the form, and I know these terms are arcane, but restricted stock units, performance stock units, RSUs, PSUs, stock options as well. There's a million different flavors of equity. And the basic way to break it down is some of them you'll just get for hanging around. They're time-based. They will eventually invest over time. Some of them are performance-based.

8:21They're tied to some sort of metric that you do have to hit. But my point is, when these CEOs are terminated, again, in three quarters of the companies we looked at, there was some sort of accelerated vesting, which means those shares that you were going to have to wait five years for, they're all yours now. For example, the Starbucks CEO, we still don't know the final value of his severance because it is based on prorated payments that are tied to the company's current fiscal year and next fiscal year. He might get paid something for the performance of Starbucks like two years after he left. Can you say more about the ousted Starbucks CEO?

9:01Was his pay package and his exit package on the high side? It was on the high side and in both cases. And by that, I mean the severance of Laxman Narasimam was extraordinarily high among the companies we looked at. And the payment to the incoming CEO, Brian Nickel, was one of the highest we have ever seen. He got$90 million, $10 million in sign-on payments and$80 million in equity just for coming in the door. And that That gets into this whole area of what we call make whole payments. The reason that number is so big is because Brian Nichol was doing a very, very good job at his previous employer, Chipotle.

9:43And he was getting this money at Chipotle for extraordinarily good performance. So Starbucks, in order to wrench him out of Chipotle, basically had to say, we have to match that. In a statement, a Starbucks spokesperson told Bloomberg, we brought in a proven leader with a strong track record to set Starbucks up for success and create long-term value for all stakeholders. He's backed by an experienced team, and much of his compensation is tied to future financial performance. Let's talk about maybe a more average company trying to poach a new CEO, lure a new CEO. What are some of the typical costs that go into that?

10:22For a more typical CEO, you're usually hiring a search firm, And Korn Ferry and Spencer Stewart are two of the better known ones. And you are going to pay that search firm, though, usually one third of the new CEO's first year payments, first year compensation. And that could be a million bucks. It could be up to five million dollars in some cases. So it is not chump change. But that's only the beginning. There are compensation consultants. And then you have all these other advisors. You need to pay PR consultants to sort of spin the departure because this has to be spun. Lawyers as well. PR people, really good ones, can cost$1 ,000 an hour.

11:02Really good lawyers can cost$2 ,000 an hour to negotiate all the disclosures and filings you have to do to negotiate and hammer out the contract for the outgoing CEO and the incoming CEO. I know the astronomer team hired the crisis PR firm behind Blake Lively's PR, which can't be cheap. Probably not an expense they were expecting to have in their 2025 fiscal year, but here we are. But one big cost that I didn't expect when I started doing this reporting, but that does come into play, is that the new CEO is probably going to want other new people around him or her. So what we often see is that what we call the C-suite, the executive leadership of a company, will usually have other departures and arrivals after the new CEO comes in.

11:50So Starbucks brought in a new CFO, Chief Financial Officer, Kathy Smith, highly regarded CFO. She received$11.4 million to come on board. Again, just her sign-on and what we call the make-hole payments because she was earning a lot at her last job. You got to pay the piper to get her into this new job. So Starbucks wanted her, though. Brian Nickel wanted her. That's what she got. And then they had to push out the old CFO? You say bye-bye to that person. Guess what? That's the severance cost. And meanwhile, the other executives at the company are getting very nervous because a new CEO is coming in and they're worried.

12:27And there's usually some type of interregnum period where there is no CEO. Certain executives are brought on as what we call an interim CEO. Let's say you take the chief operating officer and say, you know, look, look, Laura, we just need you for six months just to, like, steer the ship, keep the trains running on time. And we're going to give you$1.2 million as a retention bonus. Sounds pretty good. Not a bad deal. Yeah. And sometimes they backfire because the executives who get paid the bonuses are not retained. They leave either voluntarily or involuntarily later. More severance, more recruitment costs.

13:02It just keeps adding and adding, which was just so fascinating to me. I was like, my God, when does this ever end? So that's how the costs to push out a CEO can spiral. But how does all this tumult impact all the people who work at and invest in these companies? That's after the break.

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16:13It sounds like everyone in the C-suite makes money when CEOs are replaced. The outgoing CEO, the incoming CEO, other executives. But for everyone else, dealing with a leadership transition can be stressful. You might have a new boss. Your boss might have a new boss. I asked Bloomberg's management and work reporter Matthew Boyle how the drama associated with a CEO leaving can impact all the other people left working at the company. People get very nervous. Am I going to have a new boss? Am I going to have a new job? Is there going to be a layoff? Are they going to bring in the McKinsey consultants and start to do some big sort of strategy overhaul?

16:51Are we taking things in a different direction? Exactly, exactly. So you certainly are going to have a hit to productivity and possibly an increase in your voluntary turnover when you have a CEO changeover like this. Well, there's a final category of cost that we haven't talked about yet, which is shareholder value. Yes. If you boot your CEO, your stock can drop. Obviously, the hope is that you're going to turn things around. Yes. You know, the stocks will rise eventually. Changing leadership will reassure investors. But what did you find when you looked at the hit to stock price during these transition periods and in the periods thereafter?

17:26The day Brian Nickel was announced as the new CEO, the stock jumped. It was like, oh, my goodness, they found this rock star. The shares rose 23 some odd percent. We're going to be Chipotle. Exactly. Everything's awesome. What was lost in that analysis? The shares had fallen 25 percent in the 12 months leading up to that. So guess what? It's a wash. So you have to look at the full period, not just the one-day stock jump on the day that the new Savior CEO is announced. There hasn't been much research looking deeply at this question. The last data Matthew could find comes from a 2015 study by PwC, which analyzed CEO transitions at 2 ,500 companies across three years.

18:10By looking at the median shareholder returns in the year before and after a CEO changeup, PwC estimated that for the world's largest public companies, these kinds of forced turnovers cost$1.8 billion in shareholder value. And that was 10 years ago. So that is the hit to shareholders. And it really speaks to a company should do a better job of, you know, this is what it all gets to is corporate governance and succession planning. and companies need to do a much better job of, they spend millions on these search firms and on succession planning and building up what they call their bench, you know, their managers below the CEO who could one day run the show.

18:51But oftentimes, as we've seen here, obviously, with a record number of ousters and all these costs flying around, they're not doing a very good job of it at the moment. So, you know, and that's on, the blame goes to the companies and it certainly goes to boards, boards of directors as well. Are there any examples of companies that have managed to replace their CEO in a more cost-effective, less disruptive way this year? I'm thinking about Warren Buffett, actually. Perfect example, yes. I mean, Buffett, as usual, is an icon here. And we've all known for years and years it was a bit of a horse race or a parlor game.

19:23You know, who was going to be the successor and in the end choosing Abel, right? A very smart choice. I mean, it got resoundingly positive feedback because I think Warren had the benefit of time. He is Berkshire Hathaway. There was no activist investor banging on the door saying, we need to know who's going to replace Warren within six months or we're going to raise hell. Exactly. He has such a reservoir of trust. Few companies have that reservoir of trust, I would say, in American business right now. This is perhaps an obvious question, but if companies are spending all this money on CEO transitions, what aren't they spending it on?

20:02Does this come at the expense of employee salaries, investing in new products? How do companies make those calculations? Yeah, it's a really good question. And I think it comes at the expense of a lot of different things. If you're paying out all this money to the CEO, you might not be paying enough for your CFO and the other executives. It certainly could come at a cost of paying your rank and file employees as well. Maybe you're cutting the training budget, what we call the learning and development budget. So there won't be as many opportunities for employees to learn new skills, let's say, in an age of AI.

20:35That's more important than ever. But you also made the good point business opportunities missed. When you have no CEO or you're looking for a new one, I think there are certainly, and many of the people I talked to for this story said, there is an opportunity cost there. You're not launching that new product. You're not entering a new market. You're missing out on a potential M &A deal, you know, that would have transformed the company. But you are so consumed with this CEO changeover that you have blinders on. One of the takeaways that I think you've really highlighted is it seems like CEOs always make a lot of money, even if they screw things up or cause a scandal.

21:12Is that fair? Like, do CEOs always fail up to the tune of millions of dollars? Yeah, I mean, there's no other way to answer that but to say, yes, they get paid ungodly sums. We know CEO pay is just increasing all the time. It's like hockey stick growth. So given that a lot of these payments are usually based on what the CEOs are earning in a given year, we certainly know that the cost to get rid of a CEO is only increasing. There's no way these things ever go down. CEO pay does not go down. The cost of making a mistake with hiring a CEO is not going to go down. I mean, an interesting thing that's in proxy statements now is what they call the CEO pay ratio, where they have to say, what does the CEO make compared to the median employee?

21:59Some of these ratios are like 600 to 1. And I know that raises much bigger questions about, you know, the American worker and wages and unions and, you know, and all that. But it really just shows that CEO pay has been stratospheric for years. And anytime they try to rein it in, one of the unintended consequences is they just find other workarounds and loopholes and ways to pay them more. But whoever is paid, they're going to be getting plenty of money. Yes, that's the common denominator here. Well, Matthew, thank you so much. This was a great conversation. Sure. Thanks so much for having me.

22:38This is The Big Take from Bloomberg News. I'm Sarah Holder. To get more from The Big Take and unlimited access to all of Bloomberg.com, subscribe today at Bloomberg.com slash podcast offer. If you like this episode, make sure to follow and review The Big Take wherever you listen to podcasts. It helps people find the show. Thanks for listening. We'll be back tomorrow.

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