What was interesting about this process is that the compensation committee took the lead on behalf of the full board. As a result, once the succession path was agreed to, the committee’s discussion quickly moved from succession planning to the potential impact of the succession decision on compensation, with particular focus on how to retain the executives who would be passed over, and how to link a portion of the current CEO’s bonus to successfully mentoring the two candidates. This smooth transition from succession to reward design was both logical and beneficial.
This story is important from a number of perspectives. First, the board approached succession planning the right way. They were looking ahead two to three years; had mutually agreed on a “baseline” of key behaviors, values, skills and experience for evaluating potential candidates; had reviewed their entire senior management team relative to these characteristics using validated assessments; and had even canvassed the market for potential external candidates.
Second, the compensation committee, on behalf of the full board, oversaw the management and CEO succession process. This made good sense given the potential link between reward/incentive plan design and succession planning decisions, but is rarely so explicitly done.
Third, the committee moved seamlessly from its succession planning discussion to how reward design could potentially support the succession process, tying a portion of the current CEO’s bonus to success in mentoring and grooming the designated successors, and to developing mechanisms for retaining those who had been passed over.
What’s interesting is that the experience is not an isolated case. In fact, a number of companies, including eBay, U.S. Bancorp, Dell, SAIC and AmerisourceBergen give primary oversight for succession planning and executive compensation to the compensation committee. In addition, a number of major companies, including Archer Daniels Midland, AmerisourceBergen, Johnson & Johnson and the Perot Systems arm of Dell, link a part of their CEO’s incentive opportunity to development and implementation of an effective succession planning process.
Despite the sad statistics, the experiences of the companies cited above indicate that positive change is coming. Further, they are demonstrating how succession planning is not just an isolated exercise, but rather part of a larger, more integrated system of managing talent that is in part characterized by a strong link between succession planning and compensation. Importantly, the market also appears to have spoken, as investors have demonstrated that they will penalize companies without a defined succession process.
Succession Planning Best Practices
- On behalf of the full board, give oversight responsibility to the compensation/ human resource committee to ensure that succession and compensation are linked.
- Engage in a proactive succession process, looking two to three years ahead.
- Evaluate skills, experience, behaviors and values relative to an agreed-upon “success profile” to ensure that the right candidates, not just those closest in rank to the CEO, are surfaced.
- Cover at least two management levels below the CEO with the succession planning process to identify not only the best CEO succession candidates, but also the “successors for the successors.”
- Include both internal and external candidates in the process, particularly when needed skills can only be found outside of the company.
- Identify specific development needs for designated internal candidates, and craft specific assignments and mentoring processes to ensure that any weaknesses are addressed.
- Link the succession planning process to the reward system to ensure that management focuses on the process and follows through, to reward those who are high-potentials longer term, and to help retain those who are top performers but not successors to the CEO.
Gary Hourihan is a senior vice president at Farient Advisors LLC. Contact him at gary.hourihan@farient.com.
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Gary Hourihan is right on every point. He is spot-on to bring special attention to the development of the ‘success profile’. This principle is critical to ALL companies, whether Fortune 500 or disruptive start-up. Every company MUST align their practices to link strategy, execution and individual performance management. Unfortunately, we are still finding companies that consider skill and past track record of success, instead of the ‘whole’. Those organizations are missing opportunities to link ROI, behavior, values and skills. Thereby, shortcutting long-term success.