Global CEO turnover hit another high last year, with turnover rates rising from both the 2024 average and the long-term average, according to Russell Reynolds Associates' Global CEO Turnover Index. This steady increase in turnover indicates a business environment where leadership changes are more frequent and less predictable. For boards, this new reality highlights the critical role that executive compensation plan design can play in enabling a smooth leadership transition.
Matt Lamb, managing director at FW Cook, says that in the aftermath of a sudden resignation, such as a CEO departure, strategic reorganization or board decision, the lack of clear planning can quickly spill over into the remuneration area. “I have seen many event-driven situations where poor succession planning results in companies taking reactive measures that create external risks.”
The board may feel the need to issue an emergency retention award to stabilize the management team or offer a large sign-on or buyout package to hire an outside CEO. Such a move could raise governance concerns and internal capital issues that could have been avoided with more careful planning.
“In my experience, executive compensation and succession planning need to be interrelated,” says Lamb. “Boards need to step back and take a holistic approach by determining what they are trying to accomplish from a succession planning perspective and how executive compensation programs will help achieve those outcomes.”
FW Cook CEO Daniel Ryterband agrees that a compensation program designed with succession in mind strengthens the continuity of leadership that boards are trying to achieve. “Strategic planning can help facilitate an orderly CEO transition, give incoming leaders the flexibility to form a team, and retain internal candidates to represent the company's future leadership bench.”
When taking a proactive approach to aligning compensation design with succession planning, compensation committees can leverage three levers:
Provisions to encourage orderly handover
Retirement eligibility criteria and provisions built into long-term incentive (LTI) programs can both be powerful tools to support a smooth CEO transition. These provisions allow long-term incentives to continue after a CEO leaves office, creating a clear incentive for leaders to remain engaged through the transition period and place a qualified successor in place before their own departure.
“I have seen many event-driven situations where poor succession planning results in companies taking reactive measures that create external risks.” —Matt Lamb, Managing Director, FW Cook
The process begins with how a company defines “retirement.” While many rely on traditional age-based or age plus years of service criteria for retirement eligibility, in some situations these definitions can have unintended consequences. For example, structures that require longer tenures may limit a company's ability to hire experienced executives with short, high-impact tenures.
As a result, some boards are reconsidering their definitions to align with their leadership pipeline goals. In addition to age and service requirements, the retirement definition can also include formal notification requirements and expectations associated with an approved succession plan, indicating that the CEO's decision to retire must be part of a planned leadership transition process.
“There is an opportunity to go beyond just age and seniority and think more holistically about what behaviors you want to discourage or encourage during the transition process,” Lamb said, citing restrictive covenants and the treatment of outgoing CEO stock compensation upon qualified retirement as factors worth considering. “Equity compensation that vests continuously, rather than accelerating after retirement, creates a built-in incentive to help find and prepare a successor, because future earnings are based on the company's performance going forward, so you need to make sure you hire someone reliable and trustworthy who won't let the stock crash in the coming years.”
Importantly, he added, these provisions are most effective when designed in advance and built into the program, rather than being introduced at the time of departure. “By proactively implementing a clear and thoughtful severance plan, you can avoid the need for a one-off severance plan. What you don't want is a bespoke arrangement that opens the door to a discussion of, 'You paid for this person, why don't you get a severance for me?'” Or it could be seen as a 'parting gift' to the outgoing CEO. ”
Market-based retirement benefits that support your talent goals
In practice, a CEO change is often followed by extensive reorganization within the C-suite. However, the lack of market-based retirement protections can delay these necessary changes and impede the ability of new leaders to hire new talent and reorganize management teams to build the strength needed to execute the strategy.
“Strategic planning can help facilitate an orderly CEO transition, give incoming leaders the flexibility to form a team, and retain internal candidates to represent the company's future leadership bench.” —Daniel Reiterband, CEO of FW Cook
“If the severance package is perceived to be light, there may be a reluctance to let go of someone who is not eligible. In some cases, the interaction between the severance plan and the severance clause can make the situation worse. If the participant continues for another year, they will be eligible for more favorable equity treatment under the severance clause,” Lam explains. Thoughtfully designed market-based exit provisions remove that friction, allowing leaders to act more quickly while avoiding the need for one-off deals that can lead to lengthy exit negotiations and scrutiny.
Retirement planning also plays an important role in recruitment. By offsetting the risks associated with joining a new organization, market-aligned retirement frameworks allow companies to bring in external talent without having to enter into bespoke severance packages.
Retention actions to protect the bench
Targeted actions can be an effective tool when there is a strong business case, such as the need to build or protect a shallow succession bench in a tight talent market. This starts with differentiating target salary opportunities for CEO successors and being willing to set target salaries higher within the market range, such as at the 75th percentile or higher.
If necessary, boards may need to take proactive actions beyond the underlying compensation program to support succession planning. But boards should approach these decisions carefully and have a clear understanding of the potential external scrutiny they may trigger, Lamb said.
“Boards need to go into it with their eyes wide open and understand that it's the right thing to do for the business, even though there may certainly be pushback from proxy advisory firms and investors,” he says. “There is a general perception that special awards are bad, but in situations where there is only one clear successor in the organization, for example, encouraging them to stick around may be worth the risk.”
What's more, says Reiterband, there are risks when you don't prioritize long-term organizational stability over short-term considerations. “The question you should ask is, what happens if you don't do this?” he says. “What will your executives who are concerned about motivating and retaining you think? Will they feel like you didn't do the right thing because of fear of governance backlash? Can you convince them that their demands and expectations weren't reasonable? The answer may be yes in some cases, but not all.”
Taking a further step back allows the board to ask more strategic questions. How can each of these tools work together to support succession planning? “These things shouldn't be evaluated piecemeal,” says Lamb. “We need to look at them holistically and strategically through the lens of proactive succession planning.”
Checklist for compensation design to support succession
Asking the following four questions will help boards build a compensation program that supports intentional rather than defensive leadership transitions.
- Do retirement policies encourage an orderly transition?
- Will our retirement design enable tomorrow’s leadership reorganization?
- Do you differentiate salaries between potential successors?
- Do we have a clear understanding of the glue that will hold on to our replacement candidates, and do we have a complete picture of the potential value offered under different exit scenarios?
Ultimately, by taking an integrated perspective to anticipate leadership transitions and proactively design compensation programs to support them, boards can move from reacting as events unfold to proactively shaping outcomes for smooth transitions.
