Why should senior leaders worry about their finances? Aren’t they all rich? No, not really. It’s quite complicated and many senior leaders actually do worry a lot about financial strain.
Let’s look at compensation. Firstly, senior leaders earn more than base pay. They have some sort of stock options if the company is public, and/or they have a bonus that is tied to the company’s market performance.1
When the markets are poor the company does not do well, which means the leader loses a substantial amount of money personally. The loss of a bonus could be catastrophic for a senior leader. Imagine losing the 60% bonus of your six-figure salary due to poor market performance.
Additionally, senior leaders tend to live an elite lifestyle. Investments in properties, investments in ventures, their children’s education in top-tier schools, expensive vacations, and exclusive club memberships.2 None of this is cheap and, in a sense, it is part and parcel with being an executive. When the bonus doesn’t come in or the stock prices plunge, it puts this lifestyle that they worked so hard to achieve into jeopardy and panic sets in.
The worry over finances is harmful to both the leader and the business itself. Research indicates that financial stress can lead to cognitive load, where individuals become preoccupied with their financial concerns.3 This cognitive load can adversely affect decision-making abilities, risk assessment, and overall leadership effectiveness.4 Overall, this has a negative effect on individual and team performance.
Leaders who are concerned about financial strain may value short-term financial gains over long-term organizational stability, making risky decisions that bolster immediate stock prices or maximize personal bonuses at the expense of the company’s long-term financial health.5
Understanding the financial concerns of senior leaders is often overlooked. Addressing these concerns is not just about ensuring individual leaders’ well-being but is also crucial for the long-term success and sustainability of businesses. If the leaders are unwell, then so is the business.
Okay, so now we are aware. Where do we go from here? Firstly, I think it is important to recognize that even if an individual receives a substantial salary, we shouldn’t assume they are rich. There are divorces, student loans, failed business ventures, debt, taxes, and if you have immigrant roots, likely some remittance payments you are making to your family back home. It’s amazing how a $300,000 per annum paycheck can dwindle down to next to nothing when all things are considered.
Next, it is important to realize that you do not have to be at the mercy of an arbitrary force called “the market”, for your financial well-being. There is actually a lot you can do. What I do is I explore the various options available to these senior leaders and we co-create a plan that works for them. Together we harness the strengths they have learned through their careers to better position themselves so they can finally relax and not worry so much about money.
- Oyer, P. (2004). Why do firms use incentives that have no incentive effects? The Journal of Finance, 59(4), 1619-1650.
- Lusardi, A., & Mitchell, O. S. (2017). How ordinary consumers make complex economic decisions: Financial literacy and retirement readiness. The Quarterly Journal of Economics, 132(3), 1445-1484.
- Carvalho, L. S., Meier, S., & Wang, S. W. (2016). Poverty and economic decision-making: Evidence from changes in financial resources at payday. American Economic Review, 106(2), 260-84.
- Mani, A., Mullainathan, S., Shafir, E., & Zhao, J. (2013). Poverty impedes cognitive function. Science, 341(6149), 976-980.
- Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73.
