Find Your Own Successor

A recent Wall Street Journal article spotlighted a few companies paying CEOs extra to aid in the search for their eventual replacement. Experts are divided on whether the practice will become more common, but suggest that HR be closely involved in the process at companies that incentivize CEOs in this way.

Thursday, May 1, 2014
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Rewarding your CEO for helping find and groom the leader that will eventually succeed him or her?

Call it an acceptable performance incentive, call it an unnecessary addition to chief executives' already hefty comp packages, or call it - as the Wall Street Journal recently did - the "hottest corporate fad." Whatever it is, the practice is gaining traction at some large and well-known organizations.

In an April 1 WSJ piece, the paper highlighted a handful of companies, "spurred in part by investors' anxiety over rocky corner-office transitions," that are paying chief executives a bit extra to help set up the organization for a smooth move to its next leader.

At Intel Corp., for example, former CEO Paul Otellini has received $4 million in stock and cash since January 2013, partly for his role in bringing along Brian Krzanich, who took over as the Santa Clara, Calif.-based company's chief executive in May of last year. According to the WSJ, Otellini has already taken $1 million in cash, and can sell half of his $3 million worth of shares this month.

Phoenix-based electronic component distributor Avnet, meanwhile, is basing CEO Richard Hamada's next annual raise partly on his succession-planning proficiency. At Bethesda, Md.-headquartered Marriott International, top exec Arne Sorenson's ability to secure the hotel chain's board of directors' approval of his CEO transition agenda helped determine the amount of his bonus in 2012, according to the WSJ.

The article also cited a report done by Equilar for the Wall Street Journal, which found 16 of the Fortune 1000 companies divulging links between their chief executive's compensation and succession planning in their latest regulatory filings.

Governance experts told the paper the number of companies making this connection is poised to take off in the next few years.

One such expert, Patrick McGurn, special counsel for New York-based proxy advisers Institutional Shareholder Services Inc., predicted the number of companies tying CEO compensation to succession planning will likely triple within five years.

With boards becoming more involved in grooming talent, the practice will be commonplace in a decade, Dennis Carey, vice chairman at Los Angeles-based Korn/Ferry International, said in the article.

Paul Hodgson, a partner at New York-based governance consulting and advisory services provider BHP Partners, takes a more tempered view.

"It doesn't seem to me [to be] a practice that will take off in popularity," Hodgson says. "While I don't see anything wrong with it, in most instances it's like paying the CEO to do their job properly, which is what they are already being rewarded for."

There are, however, circumstances in which rewarding the CEO for helping to select his or her successor may be desirable, he says.

If the organization has been made aware that the current CEO intends to leave, for instance, "a little push for succession planning through a bonus might be a very effective way at implementing a smooth transition," says Hodgson.

Don Lindner, executive compensation practice leader at Scottsdale, Ariz.-based WorldAtWork, doesn't think the practice of rewarding executives for helping to find their successors "will or should" become commonplace at large organizations.

"A very important part of a CEO's responsibility to the company is to be accountable for succession planning for executive positions, including the CEO position," says Lindner. He agrees that offering incentives to CEOs for their role in succession planning is likely best left to "unusual or difficult situations where, for whatever reason, the only way to get the CEO's attention on this critical issue is to add an incentive."

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However, Gregg Passin, senior partner at New York-based Mercer, says the firm is seeing compensation committees at "an increasing number of companies" expand their mandates to take on overall executive talent-development responsibilities, including succession planning.

"It makes sense," says Passin, "to engage CEOs and other executives in the succession planning process for their roles, and for those of their direct reports. In fact, most companies do that currently. Rewarding their efforts and results in succession planning also makes sense, especially for executives who may otherwise be reluctant to do so.

"Some say that what gets measured gets done," he says. "So, from that perspective, it makes sense, especially for executives who may be reluctant to think about a successor. While most companies already include executives in the succession planning process, not all include it overtly in determining an executive's incentive compensation."

In the event the organization does opt to offer such incentives to CEOs, "the HR leader should be fully involved in the whole process," adds Hodgson.

"Indeed, there might be an argument to incentivize him or her in the same way as the CEO," he says. "HR leaders should have the same list of names as the CEO, should be meeting with the board, and should be planning how to test the mettle of the various candidates, to make sure the right one is chosen. The only issue here is if the head of HR is in the running [for the chief executive spot]."

HR must also make sure the relationship between results and pay outcomes are well-defined and understood by executives, adds Passin.

"Something like succession planning is likely to be subjective in nature, so results and standards of measurement need to be well-defined," he says. "It is likely that success in some years will [come in the form of] well-documented succession plans, rather than an actual succession. HR needs to take the lead in making sure all of this is set up appropriately and is well-understood."

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