of directors expect at least one member of their C-suite to depart suddenly over the next two years.
said their use of 1x special awards increased over the past two years, and three-quarters said the time spent on broader workforce issues increased over the past two years. Boards are primarily focused on employees with reporting relationships two levels down from the CEO.
Culture / Employee Experience
Career & Growth Opportunities
Directors voiced concern over the increasing risk of unexpected voluntary departures among their senior leadership teams—and many said the issue is now much more prominent on the board agenda than it was before the Covid-19 pandemic.
The rationale for boards to discuss this risk throughout the year is evident: the retention of executive talent is critically important to the business because unexpected departures can severely impact growth. A single departure, if it’s from a key individual—even one who isn’t a member of the senior executive team—can derail plans.
When asked who they believed was most at risk of leaving the company unexpectedly, two-thirds of directors said one of the CEO’s direct reports—and 50 percent also cited the risk of a person one to two levels below that could also depart suddenly.
To succeed in this era of high competition for talent, boards must go beyond the traditional practice of succession planning and request visibility into the full talent pipeline, well below the level of the CEO, in order to fulfill its duty to protect the sustainability of the company.
While the majority of directors surveyed said they felt they had enough information to anticipate potential risk of voluntary turnover at the top, more than a third aren’t so sure.
Looking at the metrics boards use to assess the risk of voluntary turnover, “missed succession plan candidate opportunities” ranked first, with 56 percent of directors citing it as a metric they find useful.
Boards need to understand succession from two perspectives:
“Executive talent management is analogous to chess. You need to think 3-4 moves ahead to ensure the board has appropriately thought through potential succession scenarios.”
Ensuring key players had competitive pay positioning came in second place, while current tenure in role ranked last. We explore those two areas further below.
Providing key members of the team with fair and realizable pay remains a top retention strategy, according to directors participating in the research. In fact, most directors said they would be willing to take a negative Say-on-Pay vote if it means awarding a special retention award to retain a top performer. And nearly half said investors and proxy advisors had very little influence on the board’s executive compensation decisions.
There’s good reason for that, directors said. When it ultimately comes down to decision-making, boards have a duty to put the business needs first, directors said, and that includes doing what is necessary to retain key talent in order to deliver on shareholder value and the strategic plan.
Nevertheless, while some compensation measures like special one-time awards have a place in talent retention, they should be used judiciously. Nearly two-thirds of directors said navigating the line between good governance and good executive talent retention/rewards was difficult in this environment—not surprising given the heightened scrutiny into executive compensation.
At the same time, the overuse of such mechanisms could indicate a failure in the company’s annual LTIPs and STIPs. Boards prone to use these measures may want to take a closer look at their executive compensation plans to identify weaknesses to avoid raising the ire of both proxy advisors and investors.
The good news: three out of five directors surveyed said special retention awards, if used, were distributed episodically; only 9 percent said they were used regularly.
There is a lot being written about employee experience—and culture plays a definite role in attracting and retaining talent at entry and mid levels across organizations. Our survey shows culture is just as critical among senior leadership teams, ranking #1 as most impactful retention driver—and detractor—for senior executives.
Leaders today have plenty of opportunities to “jump ship and get more money” amid a flood of opportunities, which in turns puts a lot more stress on boards to think beyond traditional monetary incentives. Boards are left to look beyond compensation to ensure top performers continue to find purpose and opportunity within the organization.
More than 80 percent of directors said “creating a strong company culture” helped companies retain top C-level talent—and 74 percent said the same for the CEO. In contrast, 45 percent listed “above median pay positioning” as a tool used to help retain the CEO—and 47 percent said the same for the C-suite, highlighting an important delta in the importance of culture vs. pay today.
For that reason, some boards have started adding culture-related targets to the compensation plan. These targets could be quantitative (voice of the employee score, management diversity, unwarranted turnover, values or ethics breaches, employee % passing specific training and development courses) or qualitative (ethics and value adherence, employee experience, exit interviews, non-hire candidate feedback, etc.)
Career advancement and growth opportunities ranked second on the list of factors that support—or detract—retention at the C-suite level, according to the survey. Yet, tenure in the role ranked last on the list of metrics boards use to assess departure risk.
Knowing top performers typically thrive on challenges and accessing new opportunities, failure to look into how long a person has been in the same role can be a grave oversight. To overcome this, some companies have turned to mentorship and development plans that ensure that employees several levels below the CEO are being coached to grow in their role or access new ones.
And while the board may not be directly involved in building those plans, it’s important that they are kept abreast of how leadership candidates and employees experience career development.
Having the CHRO attend board meetings, especially those where succession planning and talent strategy are on the agenda, is of course a great way to heighten the conversation and enable directors to see deeper into the company and leadership development efforts. This adds exposure to not only the current set of key executives but also those people who are coming up behind them, so that the board has a firmer grasp, when looking at a three-to-five-year plan, on the risk of losing momentum in any functional area should there be a change in leadership or, perhaps worse, a sudden outflow of valuable employees.
One thing is clear: traditional succession planning is no longer sufficient to minimize the increasing risk of turnover at the top. Boards have a responsibility to not only ensure the next wave of leaders is being groomed but also identify the talent that is most at risk and most detrimental to lose for their companies.
But quantifying the risk of departure—especially one to two levels down from the CEO—can prove challenging for boards. While two-thirds of the directors we surveyed said they were confident they had sufficient information to forecast C-suite turnover accurately, the directors we spoke with said boards tend to rely mainly on feedback from the CEO to keep them abreast of the potential risk of losing individuals within and below the C-suite.
Predictive analytics can play an important role in helping boards better understand where the company is vulnerable and what interventions can be administered to keep talent and avoid the disruption of premature departures. To help boards with this matter, Farient has developed a two-dimensional matrix that assesses a person’s “holding power,” defined as the current value of their unvested LTI grants as a percentage of their total direct compensation, against their “pay positioning,” defined as how the total direct compensation ranks against market peers.
Once holding power and pay positioning are defined along their respective axis, boards can more clearly see the executives at risk of departure. Additional analyses can then be conducted on the select group of executives to identify ‘desire to retain.’ Factors in the desire to retain discussion include succession criticality and planning, the strength and depth of next-generation talent, performance and experience.
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Farient Advisors LLC is an independent premier executive compensation, performance, and corporate governance consultancy. Farient provides a full array of services linking business and talent strategy to compensation through a tailored, analytically rigorous, and collaborative approach. Farient has locations in Los Angeles, New York, and Louisville, and works with clients globally through its partnership in the Global Governance and Executive Compensation (GECN) Group. Farient is a certified diverse company and is recognized by the Women’s Business Enterprise National Council.