CEO tenure at large public companies is at a relative low, and the past few years have seen a slew of announcements about prominent CEOs rolling out of the role unexpectedly. Together, these two trends are prompting conversations in America’s boardrooms: Can it happen to us? Do we know our CEO’s plan? And are we doing everything we can to retain mission-critical talent, especially potential successors?
When we asked 150 public company directors these questions in June and July 2024 as part of a survey conducted with Farient Advisors, we found a heightened level of concern about the potential for key executives—including the CEO—to suddenly depart. In fact, 61 percent of directors reported that the recent spike in unanticipated exits has prompted conversations about the increased risk of senior executive turnover, with 40 percent stating that conversations around that particular risk have risen from the committee level to discussions with the full board.
One driving force behind turnover at the top may be the intense pressure leaders face in the current operating environment. Jonathan Foster, a director who serves on four public company boards—Lear Corp, Masonite International, Five Point Holdings and Berry Global Group— cites the geopolitical issues, social pressures, political pressures and 24/7 scrutiny today’s leaders face as factors leading to shorter CEO tenures. “You put those variables together and perhaps you’re 58 or 62, and it’s a long and demanding road,” he says. “Hopefully you’ve done well for your shareholders and stakeholders—and yourself—and you might move on a bit sooner than you might have chosen to 10 years ago.”
Replacement Readiness
More surprising and far less excusable than a CEO exiting earlier than planned is a board caught both unaware of and unprepared for the transition, says Paul Medini, a director on the board of NYSE-traded property and casualty insurer RLI Corp. “When a CEO decides to leave [barring an unforeseeable external incident], there is some warning signal,” he says. “Somebody didn’t pay attention. It wasn’t seen; there wasn’t a discussion.”
To guard against that outcome, RLI’s board makes a point of holding regular, candid conversations with CEO Craig W. Kliethermes about leadership over the long term. “The first thing that we do every year is talk to the CEO about his plans and his desires,” Medini says. “You need to have an ongoing dialogue with the CEO specifically about transition and his plans. What does he want to do? What does his future look like? Let’s say he keeps on doing a great job as a CEO, well, do you want to do it till you’re 70? I mean, what are the CEO’s career aspirations? You need to know that.”
Boards also need to prepare for the unexpected—the infamous “hit by a bus” scenario—by having multiple candidates capable of stepping in immediately. “You need to have successors ready,” he says. “You don’t want to put all your eggs in one basket that you don’t know what’s going to happen.”
But having CEO-ready replacements in the wings is harder than it sounds. “When you’ve got a CEO in his let’s say mid-50s in year two, it’s hard to envision that person not being there,” acknowledges Foster. “But you can’t be blinded by that. You just should be working hard at having at least two internal successors. And if you don’t, you need to be darn sure you’ve got an interim who makes sense and know exactly what you would do if, God forbid, something happens.”
After overseeing four CEO transitions— each brought about by phasic growth spurts that took the company from $50 million to now being on target to hit about $10.5 billion in 2024—Fortune 500 ServiceNow’s Jeff Miller has learned that the best succession plans incorporate a future focus, building a bench of CEO candidates with leadership qualities suitable not only for the company as it is today, but also for where and what it will become. “You have to skate way ahead of the puck,” he says.
And the job is never done, adds Miller, who explains that a rigorous approach to succession planning has served his company well. ServiceNow conducted a 20-month search that culminated in bringing former Bain & Company and eBay CEO John Donahoe back from retirement to serve as its CEO—only to have Donahoe depart to take Nike’s helm less than two years later. Fortunately, the company had a succession plan in place for just such a scenario, says Miller, who adds that while ServiceNow expects its current CEO, Bill McDermott, to remain in place for some time, succession is an “ongoing process.” “If something, God help us, happened to Bill unexpectedly, I believe the board would be very comfortable at this point having one or more fully qualified internal candidates because we’ve done a lot of planning and development.”
Keeping Candidates
Many directors view the risk of losing high potential talent to poachers as a top succession concern—and far more likely than the CEO’s departure. Executives below the C-Suite were viewed as most at risk of departure by survey respondents, with 54 percent reporting that executives one or two levels below the CEO’s direct reports are most at risk of departing unexpectedly. Only 5 percent rated their CEO as most at risk of leaving.
Yet, while 76 percent of the directors we surveyed say their board oversees succession planning one or two levels below the C-Suite, only 56 percent report being prepared for an unplanned departure within that group. Those numbers drop even more when looking at potential departures below the executive level: 51 percent of directors say their board oversees management’s succession plan at that level, and only 32 percent report being prepared for an unexpected departure within that group.
However, complacency about candidates in line for C-Suite roles is a mistake, says Archana Singh, who chairs the human resources and compensation committee at Primo Water and has served as CHRO for large public companies such as John Wiley & Sons and Expedia. Singh says Primo Water approaches the conversation through a series of “follow-ups and follow throughs” to ensure the company has a deep bench for critical roles without putting the board in jeopardy of crossing the management vs. governance line. “We’ve identified about 15 roles that are very critical for organizational success and continuity and for which the teams have put together a succession bench,” she says.
At Primo Water, each C-Suite officer is responsible for building their own succession bench. “So, the CFO’s succession bench is owned by the CEO, but the head of accounting’s succession bench is owned by the CFO,” she explains. “And what we’re doing is using that as a metric for the CFO’s performance evaluation, making it more overt to say this is a critical part of creating the legacy.” All the while, the board retains a line of sight into this talent pool. “It’s about really challenging the CEO and CHRO to come up with, what specific experience do they need? And then using the following quarter to follow up to say, ‘Did this happen or not?’.”
Ensuring that the board has insight on talent a level or two below each key position can be critical, agrees Scott Letier, who chairs the board of Xerox and its divested entity Conduent. “We start having those conversations sometimes at lower levels than you’d expect,” he says. “Because those are the people who, in two years or three years, could be our next CISO. Or these three people could be successors to the CFO.”
That’s also the philosophy at Regency, where the process at the C-Suite level and below is led by the CEO but reviewed formally by the board once a year, says Deirdre Evens, a former CHRO who serves as chair of the compensation committee on the board of Regency Centers. “Because if you had to execute,” she explains, “you want to know that we’re going to hit the ground running and certainly not be in a situation where we’re starting from, ‘What do we do now?’”
“There are things we do as board directors that are critical,” agrees Blythe McGarvie, whose experience as a public company director spans companies such as Pepsi, Viacom, Travelers and Accenture, and currently, LKQ Corporation, Sonoco and Apple Hospitality REIT. “Choosing the next CEO and making sure our leadership is developing talent are two of them. And technically, that means the next level or maybe even the second next level because you never know.”
Medini says that the board should at a minimum understand the potential gaps a departure a level or two below the C-Suite can cause and what’s being done to mitigate that gap risk. “Every meeting [of the comp committee], we have a quick update on what’s happening with that. For instance, this person wants to retire in four years, so what’s the game plan there?”
Comp’s Retention Power
Compensation is widely acknowledged as a key tool in retaining the top performers vital to the strategic plan of any company—and even more crucial to its leadership talent pipeline. Fifty percent of survey respondents said offering the right compensation package is critical to retaining the CEO, while 46 percent rated it as one factor among many. Slightly more respondents (57 percent) rated compensation as critical to retaining some members of the C-Suite, with 42 percent rating it as one factor among many.
Evens says finding what works can be tricky but should take into consideration the person’s potential rather than focus solely on performance. For instance, companies may want to give out a bigger portion of the equity piece to their top performers, “even if they might have had a bad year or they might have only hit 80 percent [of their target] as opposed to 100,” she said. “When you’re handing out that equity, a lot of companies will have a range that you can hand out, and the upper end of that range goes to those people.”
Considering the level of scrutiny over executive pay at public companies, best practices call for playing inside the comp plan’s existing ranges and limiting the use of discretion, which can raise eyebrows among shareholders and potential activists. “Our existing instruments should have the necessary stretch available for us to do differentiated things, so we don’t have to do special categories,” says Singh.
Yet, most directors we surveyed said they would take the risk that comes with handing out a special award if it meant retaining their CEO. In fact, 60 percent reported that they have either considered making a special award or have made one, and two-thirds said they would be willing to take a one-year low SOP vote (e.g., <80%) for it. The practice also extends beyond the CEO. Among those who report using compensation as a retention tool, 70 percent give special equity grants to their succession candidates, and 34 percent pay target compensation at substantially above market levels.
At times, the risks related to losing a CEO or mission-critical performer justify such decisions, and boards need to take the heat, says Foster. “I don’t love a special deal for the CEO, but if you think it’s necessary, you should do that and be willing to accept a negative say on pay,” he says.
At times, shareholder ire over pay practices is an outgrowth of market circumstances. “The need to retain key executives in the face of strong competition for talent is driving up the cost of compensation and is in conflict with investor preferences, putting compensation committees and investors on a ‘collision course’,” says Robin A. Ferracone, CEO of Farient Advisors, a partner in this research. “These situations highlight the need for compensation committees to determine whether there is a systemic retention risk in their normal ongoing compensation programs that should be corrected and to develop strategies for mitigating those risks in advance to avoid the ‘collision.’”
Boards can adopt approaches that help make compensation retention strategies more palatable to investors, she adds, such as by limiting the frequency and magnitude of such awards or making the award performance-based (even if on an individual basis) and clearly disclosing the rationale to investors.
Letier recounts doing just that at Xerox, when the company granted a one-time special award not only to the leadership team but also several levels below in the aftermath of the pandemic, despite declining revenues due to the shutdown of offices. “Covid basically destroyed every LTIP program that it touched, and so we had all of these executives who were going to go multiple years without getting any of their performance stock awards,” he explains. “You can say, ‘Okay, well the shareholders didn’t get rewarded either,’ but the shareholders were going to get a lot less rewarded if that whole management team defected. So, as a measure, we did a onetime award to adjust for that… Of course, we still got the no vote, but I thought we did the right thing. I still do.”
Generally, however, Xerox avoids talent bidding wars, he adds. “We try to make sure our compensation is competitive and that we give them good equity with good upside, but there’s only so much we can do,” Leiter says. “How are we going to stop them from going to Nvidia? If somebody like that comes after them, there’s nothing we can do at Xerox. We’re going to let you prove your medal here, and then if you move on, you move on. We do the best we can.”
To consider making an exception, “we’d have to feel like that person leaving was going to be significantly detrimental to the organization,” he says. “Coming out of your shoes and messing up the entire C-Suite comp structure isn’t worth it.”
Ideally, companies will incorporate compensation tactics into a more holistic approach to retention. “Compensation clearly has to be at market, and perhaps above market, and rightly above market for superb performers,” says Foster. “But let’s be honest, if you’re a CEO for five years or more at a large company and the stock’s done okay to very well, you’ve probably accumulated generational wealth. So, by definition, it’s got to be more than that. It’s got to be a team that’s enjoyable. It’s got to be a board that pushes you but is ultimately supportive. It’s got to be an expanding product line. It’s got to be accelerating your international presence. It absolutely has to be more than just compensation.”
Appealing to executives on fronts other than pay is worth exploring, agrees McGarvie, who advises doing “something better than that, such as maybe flexibility on where the person lives that might be counter-cultural and say, ‘Hey, I know you want to go back to your Florida home. Go ahead, start doing it now.’”
Singh, however, says Primo Water prefers to steer clear of special accommodations. “I can totally see that some boards would want to ensure that every individual feels that they are special,” she said, “but for us it’s been more about ensuring the expectations are more equitable, that there is equity of experience and expectations, as opposed to too much personalization.”
Instead, the board plays inside the lines of its existing plan. “What we look at is their realizable compensation over the next three years, and we make sure that it is differentiated enough that realizable compensation is mostly equity,” says Singh. “How will the amount of equity they have grow over time so that there is stickiness from that perspective? Now, we are also aware that anybody can come in and buy it out, and we don’t want to create too much difference between other players at the same level, but we do look at realizable compensation and make sure it is reasonably sticky, at least 2 to 3x the annual compensation over that timeframe.”
When a valued executive is soliciting offers, the problem typically goes well beyond the issue of compensation, she adds. “If someone has already interviewed and gotten a job elsewhere and is at the negotiating stage, then we’ve already lost their heart and it’s better to let them go. Because in my experience, people tend to leave their résumés updated, and all the reasons they were looking elsewhere still continue. Compensation alone is not a clean hook.”
