Is Your Executive Compensation Program Aligned with Your Succession Plan?
Is Your Executive Compensation Program Aligned with Your Succession Plan?
When was the last time you thought about your organization’s succession plan?
Boards have reviewed succession planning at the C-level for some time, and most organizations have documented plans for short and long-term succession strategies. Succession planning should be a priority for all organizations – as looming retirements in conjunction with the battle for talent make proactive succession planning a critical component of the strategic plan.
However, since most companies were in crisis mode during the pandemic, the focus was on immediate concerns, and longer-term succession planning strategy was not necessarily at the top of that list. It’s likely that there is some “catch up” work to be done, particularly concerning the link between your succession plan strategy and executive compensation strategy. More on that link in a moment.
According to a 2019 study by Korn Ferry, the average age (at that time) of C-Suite executives was 59 (60 in financial services). Some quick math tells us that those execs are now 62 or 63. Add to that the findings of a 2022 Deloitte study that indicated that nearly 70% of C-suite execs were seriously considering quitting their current tole to find something that better supported their “wellbeing.” This means that in the next three to five years, if not sooner, many C-suite executives will move elsewhere or retire. The pandemic already fast tracked some of this movement, with executives, like many other employees, determining that they wanted to make a change or step out of the workforce, either temporarily or permanently. This required short term reactions for companies, but not necessarily a review of how to address longer-term succession issues.
If you were fortunate (or maybe not so fortunate, depending?!), and your executive team stayed intact, you may now be feeling confident, but don’t get too comfortable just yet. Read on!
Let’s talk for a moment about the components of executive compensation and then segue back to how your succession plan has an impact on your executive compensation program.
Components of Executive Compensation
- Base Pay – Annual base salary – typically earned and paid bi-weekly
- Short-Term Incentive Pay (STIP) – Cash or other reward that is available to executive soon after it is “earned.” Typically paid annually based on performance factors of one year or less. Most typically paid in cash but can be provided as equity without vesting requirements.
- Long-Term Incentive Pay (LTIP) – Reward that is “earned” over a period of time, typically three to five years. There are numerous vehicles for this – e.g., equity awards such as performance restricted stock grants, stock options, cash awards based on long-term performance factors, deferred compensation plans, phantom stock, performance unit plans, etc.
- Retirement Pay - Rewards that are available and paid upon “retirement” (as defined in a plan). Typically, in addition to whatever pension vehicle, if any, the company sponsors, executives may have a Supplemental Executive Retirement Plan (SERP) and/or some other form of Deferred Compensation plan where funds are deferred until retirement.
- “Other Executive Pay” – Includes executive perquisites – e.g., company vehicle, country club membership, as well as executive benefits, such as, additional life insurance, executive physicals, specific advising services, etc.
On the other hand, LTIP and retirement are by nature, focused on retention since the reward is not available for a period of years. Of course, depending on the individual executive, LTIP and retirement may be equally important as the base and short-term opportunity from a talent attraction standpoint.
How Your Succession Plan Impacts Executive Compensation
Each of these components is important; however, the relative importance of the various components to each individual executive may differ depending on where they are in their career, their lifecycle, and their desired lifestyle. Similarly, boards and/or ownership have other priorities. What is most important to boards and other stakeholders is that executive rewards are tied to performance and company results. On top of this, for public companies, we add the interests of shareholders, the opinions of shareholder advisory services, and the oversight of regulatory agencies. As a result of varying priorities, building an executive compensation program designed to attract and retain top talent in a manner that is compliant and viewed positively by all stakeholders is often an interesting balance, often requiring negotiation, between boards/ownership and executives!
The goal is to keep all parties focused and engaged for the betterment of the organization and all rewards should be structured to drive, reinforce, and motivate the behaviors and results that make the organization successful - with all that implies – while also being competitive with the external market and positioned to attract and retain the talent needed!
- It’s Not JUST about Financial Results
- Where your successors come from may impact your compensation plan
- Industry impact
It is equally important that the executive rewards offered fit the culture and needs of your organization. For this reason, adoption of an executive compensation philosophy/strategy is a critical first step.
HR Consulting
The board/ownership and the executives need a trusted advisor to ensure that executive compensation is appropriately competitive, supports organizational strategy- including succession planning- and meets the executive’s desired financial goals (which keeps them engaged/effective). Herbein | Mosteller HR Consulting provides this guidance and support to our clients every day. We welcome the opportunity to talk with you about your organization’s specific business needs, and your talent and compensation strategies. Call one of our senior team members today.
P.S, On a related note for public companies, the SEC recently issued a final ruling that will expand the executive compensation reporting requirements for the 2023 proxy filing year which focus on for the relationship between performance and executive incentive pay. Stay tuned for more updates on how to comply.
Article contributed by Laurel Cline.
Human Resource services are offered through a division of Herbein. Herbein I Mosteller HR Consulting is a subsidiary that was formed through the addition of Mosteller and Associates.
