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Business Spells COO a New Way: MIA

October 22, 2012
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Related Topics: Corporate Culture, Organizational Culture, HR/Workforce Trends, HR & Business Administration, Latest News
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Until last month, Hyatt Hotels Corp. had two chief operating officers. Rakesh Sarna presided over international operations, and H. Charles Floyd handled things in North America. But in early October, the company reorganized from two divisions to three and gave both operating chiefs different responsibilities. Both will have the title of group president, and no one will be COO.

Across Chicago and the rest of the U.S., chief operating officers are being erased from the org chart. The disappearing act is part of the evolution toward flatter business structures as well as get-lean pressures that have companies looking twice at any personnel expense. Additionally, a chief operations officer doesn't seem as special as, say, such newer roles as chief information officer and chief technology officer.

The shift means more work for executives picking up operational duties, but it's good for employees and shareholders if it makes companies more flexible, responsive and, in a small way, profitable.

Only eight of the 25 biggest companies by 2011 revenue in Illinois have COOs; those doing without include Walgreen Co., Abbott Laboratories, Allstate Corp., Deere & Co., Exelon Corp. and Baxter International Corp. Smaller companies are dropping the position, too. Last month, Huron Consulting Group Inc. promoted its COO, James Rojas, to a managing director of Huron Legal, with no plans to fill the vacancy. Groupon Inc. did away with the post last year after its first two COOs quit.

If the elimination of COOs puts chief executives closer to the action, getting information through one less filter, "they have a better feel as to what's going on," says David Larcker, a professor at Stanford University's Graduate School of Business who specializes in corporate governance. "That provides a better basis for them to develop strategic plans."

This is a tough break, of course, for the COO, who in the 1970s and '80s was a key member of the corporate executive team, responsible for overall operations. The ideal COO spots problems and reorganizes where necessary, trying to maximize the operational effectiveness by correcting when lower managers lack the bigger picture, says Samuel Culbert, management professor at UCLA's Anderson School of Management and author of "Get Rid of the Performance Review."

But this year just 35.4 percent of large companies—Fortune 500 companies plus others in the Standard & Poor's 500 index—have people in that role, down from 47.4 percent in 2000, according to a recent study from executive search firm Crist Kolder Associates LLC in Hinsdale, Illinois. While the decline has mostly been gradual, the drop was particularly steep last year as the number of the country's largest companies with COOs fell by 5 percentage points to 237.

Some industries have lost more COOs than others. Chief operating officers soldier on at 45.6 percent of services companies and 44.4 percent of retailers, but only 35.2 percent of tech companies see the need for them. Industrial outfits have the fewest by far, with just 21 percent employing a COO.

As they jettison COOs, chief executive officers are handling more direct reports, almost double the number they were in the 1980s, according to the National Bureau of Economic Research. Chief financial officers are picking up some operational duties, too. That's partly because of the Sarbanes-Oxley Act of 2002, which requires CEOs and CFOs to sign off on financial statements. "In response, if CFOs were going to be on the hook, they needed increased vision into all the operations," says Matt McGreal, a principal at Crist Kolder.

COOs don't come cheap. The median total compensation for a chief operating officer at an S&P 1500 company was $2.2 million in 2010, up 30 percent from a year earlier, according to a 2011 report on COO pay from Equilar Inc., an executive compensation research outfit in Redwood City, Calif.

But cutting the COO won't save company owners as much as they think if they're only turning around and paying more for other executives, warns Jan Koors, managing director at Pearl Meyer & Partners, a Chicago-based executive compensation consulting firm.

COOs still have some use, particularly as a succession tool. McDonald's Corp. appointed a COO recently, replacing Don Thompson, who moved up to the top job.

At Moline, Illinois-based Deere, Samuel Allen was promoted to CEO from COO in 2010. A spokesman says that Allen had the title for just two months during the transition of leadership and that the agriculture equipment company hasn't had someone in the COO role for any significant time since the early 1990s.

Emily Lambert writes for Crain's Chicago Business, a sister publication of Workforce Management. Comment below or email editors@workforce.com.

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