Succession planning, or the lack thereof, has been receiving a lot of notoriety. There have been the high profile situations including the departure of Mark Hurd from HP, Steven Jobs' illness, the cancer diagnosis of AIG's CEO Robert Benmosche, and most recently, the rejection by Apple's shareholders of a proposal to adopt and disclose a written succession planning policy. Add to this a recent Harris Poll and studies by Towers Watson, Stanford University's Rock Center for Corporate Governance and Korn/Ferry, among others, showing that most companies do not have an effective CEO succession process.
Given this context, I just heard a very interesting story. A close friend and associate of mine had been working on a CEO succession assignment for a major Fortune company, whose CEO had announced his intention to move on in two to three years. At the request of the Board, my friend had assessed and evaluated the firm's entire senior management team and also had screened the external market for possible successors with the requisite experience and compatible cultural values. His work resulted in identifying two internal and several possible external candidates, although he had a strong bias for the company to "stay internal" to help ensure cultural continuity. He therefore recommended that his client focus on developing the two internal candidates by broadening their exposure and giving them assignments that addressed gaps in their experience. His process also identified potential internal candidates to fill the successors' current roles if they were promoted.
He was asked to present to the Compensation Committee his findings and recommendations, which were very well received and unanimously approved. The Committee then quickly turned its attention to how their decision on succession should impact compensation. This discussion focused on the following possibilities: (1) linking a portion of the current CEO's annual bonus to his proactive development of the designated internal candidates, (2) rewarding the designated candidates for enhancing their experience in key areas, and (3) providing special retention packages for those senior executives who were not designated as potential CEO successors.
I found the above story intriguing from several perspectives. First, despite the recent negative press highlighting the lack of effective succession planning, here was a Board of a major company that was doing things the right way. They were looking two to three years ahead, had identified and agreed upon the skills, experience, and cultural values required for success as their CEO, had evaluated their entire senior management team relative to these success requirements using a validated behavioral and skill-based assessment process, and had canvassed the external market for potential backup candidates.
Second, I was taken by the fact that the Compensation Committee, rather than the Nominating and Governance Committee, or the full Board for that matter, was responsible for overseeing management succession. While there is no one right answer on which group oversees succession, it's important that the succession planning process has a "home." I thought that having the succession planning process vested with the Compensation Committee was interesting as it better ensured that there would be a link between succession and compensation.
Third, I was pleased to hear that the discussion at my friend's client had moved so seamlessly from succession to how incentive/reward design could support the succession process. Too often, in my experience, the compensation discussion fails to relate back to the succession discussion in any organized way.
In thinking about this story, I asked my colleague, Gary Hourihan, a Senior Vice President at Farient Advisors and expert in succession planning, whether he finds it typical for Compensation Committees to take the lead in succession planning. He cited a number of companies, including Dell, eBay, US Bancorp, and AmerisourceBergen, where succession planning is done by the Compensation Committee. He also indicated that firms such as Archer Daniels Midland, AmerisourceBergen, and Perot Systems (now part of Dell) tie a portion of their CEO incentive opportunity to developing and implementing a successful succession planning process. While these companies do not yet represent a trend, they do signify some encouraging signs.
Given this context, I am optimistic that the recent attention to CEO and executive succession planning is headed in the right direction. For me, the succession planning process, to be most effective, needs to:
- Have a "home," wherein either the full board or a Committee of the board is explicitly responsible for succession planning
- Be proactive and looks two to three years ahead
- Be based on a thorough evaluation of skills, key behavioral characteristics, and cultural fit relative to an agreed upon "success profile"
- Encompass both internal and possible external candidates
- Identify specific areas of needed development for designated internal candidates and provide the means for them to develop (e.g., special assignments, mentoring)
- Proactively and explicitly link the succession discussion with the compensation discussion
Regarding this last point, there are many potential outcomes in linking succession planning to compensation. There are those considered by my friend's client, as well as those considered by Farient's clients, such as differentiating equity awards for high-potential (vs. solid) executives each year. This is a case in which the quality of the discussion is at least, if not more, important than the outcome.
Robin A. Ferracone is the Executive Chair of Farient Advisors LLC, an independent executive compensation and performance advisory firm that helps clients make performance-enhancing, defensible decisions that are in the best interests of their shareholders. Robin Ferracone is the author of a recently published book entitled Fair Pay, Fair Play: Aligning Executive Performance and Pay, which explores how companies can achieve better performance and pay alignment.
Thanks to Blogs Forbes