The C-suite is getting crowded, with top management teams doubling in size since the mid-1980s. And it’s not just the size that’s changed, says Professor Maria Guadalupe — the composition of top management has changed as well, with some important considerations for organizations to heed.
Working with Hongyi Li of MIT and Julie Wulf of Harvard, Guadalupe has shown that the growth of the C-suite is largely the result of a disproportionate move away from general managers and toward specialized functional managers.
“Most positions reporting to the CEO used to play a general management role. But in recent years most of the increases in the number of positions reporting to the CEO are the result of the addition of functional managers to the roster,” Guadalupe notes.
“Instead of general managers who carried out many different functions for the specialized units they ran, there are now marketing officers, finance officers, legal counsel, chief information officers — positions that specialize in one particular function that applies across the organization.”
To more closely assess these changes in the C-suite, the researchers used confidential firm data from Hewitt Associates. These audits of management positions, reporting structure, and pay from 300 Fortune 500 firms allowed the researchers to track changes over time for each firms’ management teams.
“Whenever we see centralization in a firm, we think: what are the synergies a firm wants to exploit?” Guadalupe explains. “Why does a firm now have a chief marketing officer at the top of an organization when the position previously did not exist? Probably because there are some marketing activities that are relevant to the different business units the firm wants to coordinate, with synergies to exploit.”
The researchers identified two specific forces at work behind the expansion and specialization of the top management teams:
• Diversification. Firms are becoming less diversified and more focused. “Firms have been shedding noncore businesses and focusing on fewer lines of business,” says Guadalupe. “To the extent that shedding businesses means that the remaining businesses are more related, the potential for synergies increases.”
• Information technology. Since the mid-1980s, firms have adopted IT in multiple waves of innovation. IT has improved the ability to communicate, share, and classify information within organizations in a way that was previously impossible, and that increases the ability to better coordinate activities across business units and hence realize synergies.
“Interestingly, we found that not all positions in the C-suite developed in identical ways in response to potential synergies in IT and a change in focus for the firm,” Guadalupe says. “For product function positions, which are very close to the product — things like marketing or R&D — the jobs require that you know the product very well and be close to it and its customers. In contrast, administrative positions like CFO or legal counsel are much further away from the product — most finance decisions don’t require intimate knowledge of a product’s characteristics.”
The researchers found that firms that increased their focus on improving lines of business added more product positions, such as chief marketing officers, reporting directly to the CEO. “As products and lines of business become more similar, the information that is needed to realize these product functions is now more common and accessible across the company,” Guadalupe says. “That creates an incentive to create a position that can coordinate marketing campaigns across the different business units. Whereas, for finance, to the extent that finance uses information that is already fairly common across the business units, it wouldn’t matter how close together you bring the units.”
For IT, the researchers found a quite different effect. As IT innovations were added but lines of business remained the same, the probability that administrative positions reported directly to the CEO increased. “It’s quite intuitive: to perform administrative functions such as finance or legal counsel, which are fairly common across business units, you don’t need much information from the product level: especially as IT becomes increasingly available, it allows for more communication and centralization,” Guadalupe points out. “Whereas for marketing, it doesn’t matter how easy it is to communicate information about marketing. If products are not similar, centralization is not going to be an efficient option.”
The researchers also found that pay structures changed as composition of the C-suite changed. For each functional (specialized) manager added to the C-suite at a firm, general managers’ base compensation decreased by 2.4 percent and total compensation decreased by 6 percent. As management becomes centralized and as functions like finance and marketing are being taken out of business units and shifted to a higher level in the organization, pay for general managers goes down because responsibility for the functions they perform has shifted upward, and their jobs become somewhat less valuable to the organization.
In light of these shifts, the implications for CEOs and firm strategy are clear, says Guadalupe. “Firms need to be very careful about how they centralize positions, especially in conjunction with the other strategic choices the firm is making,” she says. “Our data suggests that centralizing product functions should go hand-in-hand with the focusing of activities. At firms that have many closely related business units, firms centralize and create specialized, functional positions. At firms that are increasing their investment in IT or already heavily rely on IT to enhance communication within the firm, administrative positions are more needed. Specialization and general administration are both important, but the firm’s strategy matters.”
As increasingly specialized managers coordinate between the C-suite and the different layers in a firm, firms must also take care to create space for collaborative decision making and ensure that managers have the skills to support those processes, says Guadalupe. “Part of a CEO’s job is to make sure employees get the training they need to develop and to groom potential replacements. The kind of training needed for these [specialized] positions is very different from the training for a general manager.”
Finally, the new composition of the C-suite can present recruiting challenges for CEOs and staff alike. CEOs may increasingly need to convince talented rising stars to specialize. But ambitious professionals and MBAs entering the market often view general management as the path with the greatest career potential. “So there is a tension between general versus specialized skills,” Guadalupe notes. “Firms need to start thinking about how to convince talent to take a more specialized route to management.”
Maria Guadalupe is the Sanford C. Bernstein & Co. Associate Professor of Leadership and Ethics in the Finance and Economics Division and a senior scholar at the Jerome A. Chazen Institute of International Business at Columbia Business School.