Sunday April 20, 2014

Establishing, Paying An Ad Hoc CEO Search Committee

Properly establishing and compensating an ad hoc executive search committee can help the board and the company successfully navigate the succession process.

Once a board determines the need for change in the corner office, one of its first decisions will be whether and how to establish a special ad hoc search committee. The need and practicality of an ad hoc committee should be based on the expected complexity and time that will be involved in the search, as well as the availability of sufficient board members to commit to the travel and time demands of the task.

Melissa Means

Melissa Means

There are several key considerations for organizing an effective search committee to manage and keep the rest of the board informed about and appropriately involved in the internal and/or external recruitment process.

Once the decision is made to establish a search committee, the first person appointed should be the chair. The best candidates to lead the committee typically are directors who have been through a CEO transition, who live within a reasonable distance of the company’s offices (because of the likelihood of numerous in-person meetings), and who have the available time, leadership skills and commitment to see the process through to completion.

Once a chair has been identified, the board should determine the committee’s size and membership. Many search committees are comprised of three to five board members, including the independent chair of the board/lead director and a representative from the compensation committee. The COB/lead director and the search committee chair are charged with keeping the full board in the loop, while the compensation committee representative ensures continuity with the company’s existing compensation program as the incoming CEO’s pay package is developed.

Next the board should decide whether and how to compensate search committee members. Most companies provide additional pay for service on the three major standing board committees (audit, compensation and nominating and corporate governance) in the form of cash retainers and/or meeting fees. However, we find many boards overlook the need to consider compensation for a newly created ad hoc search committee.

As a general rule, any decision regarding whether to compensate an ad hoc committee ideally should be made prior to the committee’s formation. Once the committee has begun its work, it may appear self-serving to go back and compensate members for services already provided. In our experience, companies that consider the issue upfront do end up providing some form of compensation. We recommend that the additional payment be delivered entirely as a cash retainer, rather than as meeting fees, because of the issues involved in having to define and track search committee meetings. Typically, companies set a cash retainer for an ad hoc committee’s chair and members that approximates the cash retainer provided to the audit and compensation committee members.

Following these simple steps for managing the process of establishing a search committee will help the company and the board start off on the right track toward a successful CEO transition.

Melissa Means is a managing director in the Boston office of Pearl Meyer & Partners, where her areas of expertise include total compensation strategy, executive compensation, short- and long-term incentive compensation strategy and design, market practices benchmarking, and board of directors compensation.

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