Last year marked yet another high in global CEO departures, according to the Russell Reynolds Associates’ Global CEO Turnover Index, with turnover rates up from both 2024 and long-term averages. That steady climb in turnover signals an operating environment in which leadership transitions are more frequent and less predictable. For boards, this new reality, in turn, has been highlighting the critical role executive compensation plan design can play in enabling smooth leadership transitions.

In the aftermath of a sudden departure—whether due to a CEO resignation, a strategic reset or a board decision—the absence of a clear plan quickly spills into the compensation arena, says Matt Lum, a managing director at FW Cook. “I’ve seen many event-driven situations where poor succession planning led companies to take reactive actions that created external risk.”

Boards may feel compelled to issue emergency retention awards to stabilize the leadership team or offer large sign-on and buyout packages to recruit an external CEO. Such moves can then trigger governance concerns and internal equity issues that might have been avoided with more deliberate planning.

“In my experience, executive compensation and succession planning need to be intertwined,” says Lum. “You need to step back and take a holistic approach where the board determines what it’s trying to achieve from a succession-planning perspective and how the executive compensation program supports achieving those outcomes.”

Compensation programs designed with succession in mind reinforce the leadership continuity boards are trying to achieve, agrees FW Cook CEO Daniel Ryterband. “A strategic plan encourages an orderly CEO handoff, gives incoming leaders the flexibility to shape their teams and helps retain the internal candidates who represent the company’s future leadership bench.”

In taking a proactive approach to aligning compensation design with succession planning, compensation committees can draw on three levers:

Provisions that incentivize orderly handoffs

Both retirement eligibility criteria and the provisions embedded in long-term incentive (LTI) programs can be powerful tools for supporting smooth CEO transitions. These provisions can provide for continued vesting of long-term incentives following the CEO’s retirement, which creates a clear incentive for leaders to remain engaged through a transition period and to put a qualified successor in place before their own departure.

“I’ve seen many event-driven situations where poor succession planning led companies to take reactive actions that created external risk.” —Matt Lum, Managing Director, FW Cook

That process starts with how companies define “retirement.” While many rely on traditional age-based or age-plus-service retirement qualification thresholds, in some circumstances those definitions can have unintended consequences. A structure with a longer tenure requirement, for example, may limit a company’s ability to recruit experienced executives for shorter, high-impact tenures.

As a result, some boards are revisiting definitions to better align with their leadership pipeline goals. Beyond age and service requirements, retirement definitions can also include formal notice requirements and expectations tied to an approved succession plan, signaling that a CEO’s retirement decision should be part of a planned leadership transition process.

“There’s an opportunity to go beyond just age and years of service and think more holistically about what behaviors you want to discourage or encourage in the transition process,” says Lum, who cites restrictive covenants and the treatment of an outgoing CEO’s equity awards upon a qualifying retirement as components worth consideration. “Equity awards that continue to vest, rather than accelerate upon retirement, create a built-in incentive to help find and prepare a successor because your future earn-outs will be based on the company’s performance going forward. So you’ll want to make sure you have someone credible, and reliable, who’s not going to tank the stock over the next couple of years.”

Critically, these provisions are most effective when designed and embedded in the program in advance rather than introduced at the moment of departure, he adds. “Proactively putting a defined, thoughtful retirement policy in place avoids the need for one-offs. What you don’t want is a bespoke arrangement that opens the door for the argument, ‘You did it for this person. Why aren’t you doing it for me?’ or are viewed as a ‘going away present’ for the outgoing CEO.”

Market-based severance that support talent objectives

In practice, CEO transitions are often followed by broader reorganization within the C-Suite. The lack of market-based severance protections, however, can delay those necessary changes, hampering a new leader’s ability to reshape the executive team by onboarding new talent to build the bench strength needed to execute on strategy.

“A strategic plan encourages an orderly CEO handoff, gives incoming leaders the flexibility to shape their teams and helps retain the internal candidates who represent the company’s future leadership bench.” —Daniel Ryterband, CEO, FW Cook

“There may be reluctance to let someone go who is just not the right fit if the severance benefits are viewed as light,” explains Lum, “In some cases, this can be exacerbated by the interplay between the severance plan and the retirement provisions, where if a participant sticks around another year, they then become eligible for more favorable equity treatment under the retirement provisions.” Thoughtfully designed, market-based severance provisions remove that friction, allowing leaders to act more quickly while avoiding the need for prolonged departure negotiations or one-off arrangements that may invite scrutiny.

Severance design also plays an important role in recruitment. By offsetting the risk inherent to joining a new organization, market-aligned severance frameworks can help companies attract external talent without needing to enter into bespoke severance arrangements.

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 by differentiating target pay opportunities for CEO successors and being willing to position their target pay higher in the market range—for example, at or above the 75th percentile.

When necessary, boards might also need to take proactive actions outside of the underlying compensation program to support the succession plan. However, boards should approach these decisions with caution and a clear understanding of the potential external scrutiny they may ignite, says Lum.

“Boards need to go in eyes wide open, understanding that yes, we may get some blowback from the proxy advisory firms, from investors, but it is the right thing to do for the business,” he says. “There’s a general perception that special awards are bad, but in a situation where, let’s say, you have only one defined successor in the organization, incentivizing them to stick around may be worth the risk.”

Ultimately, incorporating an integrated perspective to anticipating leadership transitions and proactively designing compensation programs that support them allows boards to shift from reacting to events as they unfold to shaping smooth succession outcomes in advance.