CEO Succession – Don’t Forget the Role of Pay

CEO transitions are expected to peak over the next year after a slowdown during the pandemic. A recent Semler Brossy piece advises that compensation planning for the new and current CEO, other potential successors to the role and any new senior leader should be considered throughout the process.

The article groups the succession journey into four phases and describes what compensation questions should be asked at each point of the process.

Phase 1: No Imminent Change:  If a strong performing CEO is not expected to depart for at least two years, boards should focus on the leadership pipeline and supporting potentials in their development. Begin reviewing the competitiveness of compensation for internal candidates. Consider:

• Does current pay reflect the high value the company places on potentials? Does their incentive mix encourage retention? Do incentives need to change to capture any expanded scope?

Phase 2: Succession in the Next Two Years: During this time, boards will validate the existing CEO profile, refine the list of internal successors or determine that a full selection process is warranted. How the organization signals the identity of the leading candidate has many implications for those not selected as well as their compensation. Reflect on:

• Should the lead candidate take on new responsibilities now and should the pay package be adjusted accordingly? Do bolder pay actions, like off-cycle awards, need to be made for non-selected candidates to retain key talent and ensure a smooth transition?

Phase 3: Just Before the Succession Event: Clarify the roles of the outgoing CEO, new CEO and changes in board leadership by determining if the outgoing CEO will have formal involvement with the company through a consulting arrangement or as board chair. Set expectations around the timing for the transition and decision authority for each role. Consider the appropriate compensation levels by asking:

• How should the new CEO’s initial pay package compare to the predecessor and the market? How should compensation be set for the former CEO given their level of involvement in a different capacity?

Phase 4: Post-Succession: The board will work closely with the newly appointed CEO to gain alignment on go-forward priorities and change management. Pay changes must be disclosed in an 8-K and board leaders will need to discuss additional communications to explain compensation decisions to stakeholders. As new leadership at the top has a ripple effect throughout the company, take a holistic view of executive pay plans to determine:

• What changes, if any, need to be made to support the new business strategy and promote collaboration with the new management team?