The Secret to Successful CEO Succession

by | Aug 15, 2018 | Board Dynamics, Governance, Leadership, Succession Planning

“Tim Hortons is hiring — Canada’s No. 1 coffee chain is looking for a new leader after the abrupt departure of its CEO. The company announced Wednesday that Don Schroeder, 65, no longer serves as president and CEO after three years at the helm and two decades as an employee.” 1 [i]said in a 2015 press release.

The board’s number one responsibility is CEO succession planning, yet so many boards ignore the criticality of proactively discussing the senior leadership succession plan.  While industrial psychologist researchers have identified that some of the most successful CEO successors are those that have been hired from within,  most organizations do not have the depth of talent necessary to identify the new captain of the team.

The Case For Internal Succession

When a board is confident in the direction of the company’s business strategy and it is staffed with a suite of executive team leadership, selecting a current team member who  demonstrates the competencies and leadership capabilities  generates the greatest chance of continued success of the organization.  When a board is put to the task of selecting its next CEO, many boards in this case will evaluate one or two internal executives through a series of interviews and competency profiling tests to determine who would be best fit for taking the next CEO role.  For year’s now, HR leaders have discussed the infamous “horse race” set up by Jack Welch at General Electric. The basic truth is that few organizations are the  “General Electric of a bygone era. All of my experience led me to the conclusion that unsuccessful searches revolve around a chasm between the financial expectations and performance criteria of the final candidate and the board.

The “Secret Sauce”

This blog focuses on how boards must get the uncomfortable conversations out of the way, before starting the negotiations with the desired candidate.  We call this the “board’s CEO negotiation playbook”.  It is the secret saucethat increases the probability of closing the candidate and getting the talent you want and mitigates the risk of the wrong candidate getting the offer.

The absolute worst-case scenario for any board (and their recruiting strategy) is when your best and final job offer of compensation, benefits and perquisites isn’t “good enough” for the candidate receiving the offer.  This is not a discussion about an employee earning $100,000, rather a CEO’s executive compensation package that is in the realm of a multi-million-dollar contract with sign-on equity and bonus guarantees.  That’s right, the next leader to drive shareholder value!

  • Our observations of the many boardrooms when the CEO succession is underway is that the board, rightfully, structures an ad hoc CEO search committee and that committee works in isolation with an executive recruiter. What the executive recruiter seems to never get right is that because the paycheck for the recruiter is a function of the CEO’s compensation, the recruiter fails to get into the uncomfortable budgetary conversation  as the search begins. Boards often do not have a solid frame-of-reference on competitive pay structures for the CEO of their future.  They know only what they were paying the prior CEO, but they lack context of competitive pay levels and pay structures within the candidate pools of talent.

The Independent Compensation Advisor: Hired to Bridge the Gap

When conducting an external search, the board must hire a reputable retained executive recruiter to validate the CEO competency profile  and to help craft the CEO search strategy.  The search strategy will often identify a few industry sectors in which qualified candidates may be working.

That said, each industry sector may present a unique pay level that is materially different to the current executive pay being offered by the organization hiring the CEO.  When we work with our clients, we conduct a compensation review for each of the sectors of interest.  The compensation review would cover not only active CEO’s within the industry, but  other key executive roles  – to help understand the various pay levels by industry and by executive.  This review enables the board to understand how competitive their current compensation/incentive plan was for the former CEO.  In some cases, the compensation sector review may identify that, within the search strategy, some industries pay materially higher than the former CEO was compensated, or vice versa.  The compensation review also identifies compensation structure trends by industry and can help paint the picture of what is “market normal” in the broader sea of executive talent.

After the compensation review is completed, it is critical to sit down with the Board and articulate the “realistic” budget for the new CEO. The market data is very helpful in validating the reality of the compensation and incentive levels for CEO candidates. The peer compensation data provides an understanding of the market spectrum the viable candidate may consider.  Are they at the top end of the market range or the bottom?  After the broader compensation “bookended” budget is identified by the compensation review, the next layer is to understand the current governance trends around the “deal breakers”.  Here is where the independent advisor can really show their courage and brevity in advising the board.

The negotiation deal breakers are the one-time requests made by the candidate.  These include: buying out the executive’s forfeited equity he or she may lose when resigning at his/her company, guaranteed bonus period, crediting years of pension service in the company’s pension plan, paying for excessive perquisites etc.  The board’s advisor will have a strong understanding of the capital market appetite for recruiting. However, the board often ignores these critical conversations up front, which is one of the leading causes for failing to close the desired CEO candidate.  For the board members reading this blog, we challenge you to ask some of your board colleagues to discuss how much are they willing to offer in a sign-on situation. Our experience – two very different perspectives.

The Negotiation Rule Book

Once the compensation review is presented, the bookended CEO compensation budget is identified and the board is aware of the market appetite on one-time sign-on agreements; the board needs to come to a unanimous view of what the board will ultimately be willing to offer to close the right candidate.  This conversation is most helpful when done before the search is started and best when the recruiter is not present, to help avoid any unnecessary conflict of interest.  After the board comes to an agreement on the go/no-go recruitment offerings, then the negotiation rule book can be formulated and presented to the recruiter.

The recruiter will benefit from understanding the totality of the “rules of the search”.  The recruiter is your front-line representative that is doing the hard work to find the candidate.  According to Jay Rosenzweig, founder and CEO of Rosenzweig & Company, the world’s leading boutique executive recruitment firm, “a key component in structuring a successful search is establishing, in advance, realistic compensation parameters. This allows the recruiter to better target the most relevant candidates, which typically saves time and produces more satisfying results for all parties. As with so many things, strong up-front research and a common understanding of objectives can make or break an executive recruitment project.”  When the recruiter understands the entire truth of the budget, they will temper the candidates’ expectations early in the recruitment process.  When a recruiter does not fully understand the budget, or the one-time requests that might be offside, the recruiter may land in uncomfortable situations where they promise the world, but can only deliver an island.  The negotiation rule book also aids in how the recruiter uses their network throughout the search. The recruiter can pivot from potential candidates that will simply be “too expensive” for the role and can convert them into a connector for referrals.  This is gold for the company and the recruiter.

Board of Directors REMINDER! – When you find yourself in the position of needing to search for your next CEO – invite your independent advisor into the process early and use them as a partner to develop the negotiation rule book that is right for your organization.

Best Practices for Board Meetings

by | Jul 27, 2018 | Board Dynamics, Governance, Leadership, Meeting Effectiveness

Advice for Efficient and Effective Meetings

Effective Board and Committee meetings are one of the key factors that allow a board from operating most efficiently and helps drive better decision-making. As an advisor to boards, I have participated in hundreds of meetings over the years and have observed both efficient and inefficiently run meetings. Ultimately, the meetings that ran most efficiently allowed the Board/Committee to move forward with its agenda and not be distracted by trivial issues that delay decision-making.

Six Actions to Ensure an Efficient Meeting

1. Development of a clear meeting agenda.

2. Provide enough notice and appropriate materials for members to be prepared.

3. Keep the meeting on time and on topic.

4. Ensure each member is able to voice their views and opinions.

5. Ensure that results are accomplished and/or action items identified.

6.  Include some social interaction and networking time.

Development of a clear meeting agenda

This includes identifying the topic and issues to be discussed during the meeting, so there is no confusion on the purpose of the meeting. The agenda should also include any actions that are required to be taken by the Board/Committee as part of the meeting (i.e. is a topic “for information only” or “does it require a decision”). Identifying who will lead the discussion of each topic must be added to each agenda item. Lastly, each agenda item should have an associated timing, provided in the agenda, so that Board/Committee members have a sense of the timing and importance of the issues to be discussed.

Provide enough notice and appropriate materials for members to be prepared

As a best practice, meeting materials and the agenda should be sent out a minimum of one week before the associated meeting to provide members with sufficient time to review the materials. Some of the boards I have worked with will even send materials out two weeks beforehand and have a pre-meeting internally to discuss materials before the actual meeting date.

Keep the meeting on time and on topic

While this task is one that ultimately is the responsibility of the Board/Committee Chair, it is important that the timelines provided in the agenda are followed. Meetings should not stray too far outside of their purpose. As an extreme example, if your Audit Committee is discussing the organization’s budget, the discussion should not stray into discussing a specific personnel issue around the CEO’s performance or compensation which are unrelated to the topic at hand. If you find your meetings starting to stray off topic, acknowledge the member’s concern as being important but that it be taken off-line and discussed at a later time. This ensures that your meeting stays on schedule and respects all Board/Committee member’s time.

Ensure each member is able to voice their views and opinions

While this task largely falls on the Board/Committee Chair, it is important that all members feel their opinions matter and are provided sufficient time to discuss their views. If you find one to two members dominating the conversation, make sure that once they have finished their point that you then ask other members, who have not had the chance to speak, to weigh in on the topic and provide their perspective. This helps ensure that all members feel like they are providing value to the Board/Committee and that a comprehensive discussion of all potential views can be had amongst the group.

Ensure that results are accomplished and/or action items identified

It is important that any actions required of the Board/Committee relating to the agenda are generally accomplished, as part of the meeting. This means bringing items to a close after an appropriate discussion has been had to ensure things are kept on track. If it is felt that more time is needed to discuss a specific issue, a follow-up action item should be identified, at the very least, so the Board/Committee has specific direction on what the next steps are to come to a resolution on a specific issue.

Include some social interaction and networking time

It is important that you allow Board/Committee members to have some time outside of the scheduled agenda to interact and network amongst each other. This helps to create a positive atmosphere and culture amongst the Board/Committee which will help ensure that all members feel respected and trust can be built. Many boards will schedule Board dinners the night before/after a Board meeting for all members to interact. This can also be done through scheduling team-building experiences/exercises either between meetings or at strategic off-sites where the Board and management are discussing organizational strategy.

Effective Meetings = Positive Results

Ensuring effective meetings of the boards and its committees is key in making sure that your board is performing at a high level. Effective meetings also lead to an appropriate discussion of all relevant issues and opinions amongst its members before actions are taken. If you find your Board/Committee meetings are less effective, look for signs of this through the factors listed above and ask questions about how you and your board can improve. By looking at what works best in creating effective meetings, you can improve your board’s overall effectiveness which should lead to better decision-making and positive results for your organization.

Determining Executive Compensation

by | Jul 9, 2018 | Executive Compensation, Governance, Leadership

Guidelines to Establishing Executive Compensation

This year’s FIFA World Cup highlights the importance of using defense to create a top-notch offense. The same can be said for Boards of Directors. The board’s best offense is a good defense, and good defense starts with a great fundamental base.  That base, in the world of compensation, is the Compensation Philosophy, and that philosophy needs to mirror the business strategy of the company.

Two critical roles of the board of directors are establishing CEO succession plans and establishing executive compensation plans that both attract and retain executive talent and deliver the outcomes that align with the goals set by the board. While the board may act in good faith, there are times when there is shareholder push back.  How can the leading boards of directors develop executive compensation plans that are shareholder friendly?  Let’s take a deeper look at how executive compensation should be established in order to better align executive pay with shareholder returns.

The data from CEO compensation research continues to illustrate that the top paid CEOs have many layers of executive compensation.  When a board’s Compensation Committee finally agrees on how executive compensation is determined, it must ensure that it is market defensible and will pass the seemingly infinite views on “appropriate compensation”.

Four Steps a Board Should Follow

There are four steps a board should follow when determining executive compensation:

  1. Establish the compensation philosophy and peer group;
  2. Review current executive compensation against market practice;
  3. Assess the business impact before making final approvals;
  4. Report the process and compensation results to the executives and shareholders via the annual Proxy.

Establish Compensation Philosophy and Peer Group

The compensation philosophy for the company is the foundation the board needs to ensure so that the outcome, at the end of the process, is highly defensible, if ever scrutinized.  The compensation philosophy must account for the business strategy, risk appetite and the principles and objectives of the total compensation program.  This philosophy can and will be unique to every business – even those competing within the same sector.  Take two of the Top 4 tech companies: Amazon and Facebook.  Amazon has stated that its business culture and strategy is built on experimentation, and as a result they do not believe in rewarding top executives with an annual bonus.  They have claimed, in the 2018 Proxy Circular (DEF 14A), that some of the examples of successful experimentation include the creation of Alexa.” Alexa…how do you define executive compensation?” …you might ask.  In contrast, Facebook says that it acknowledges the business still being in the early stages of its journey, and that it must hire and retain people who can continue to develop the strategy, quickly innovate and build new products, bolster the growth of the user base and user engagement and constantly enhance the business model.  To achieve this, Facebook believes in more equity compensation, so it has further stated that it intentionally positions the cash compensation (base salary and annual bonus) below market but provides more of a heavy focus on equity-based compensation.  Overall, Facebook has stated it wants its executives to be bold, move fast and communicate openly.  In contrast to Facebook let’s examine Amazon and its approach to motivating executives.

Amazon, in line with its compensation philosophy, expressed that an annual bonus paid to the top executive officers is counterproductive to supporting an experimental business, and that short-term objectives will only focus on the “known.”  Amazon says that without a bonus program, the executive team will be more willing to truncate projects when early failure is detected.  Amazon states, in the proxy, that by not having a bonus program, it allows the executive team to abandon “failed” experiments, to focus on the “winning” ones.  One example that Amazon states, in the proxy, is that the management team was able to exit its auction type business early and focus on other winners such as Amazon Web Services (AWS), which has become a dominant force in Amazon’s revenue growth.  In lieu of the use of an annual bonus, Amazon has focused on a reasonable base salary but a dominant equity-based compensation arrangement, that ultimately will link future realized income for executives tied to the future Amazon share price (positive or negative).

What each board has demonstrated is that while Amazon and Facebook both compete for exceptional executive talent, the compensation philosophy has been customized to reflect the unique business strategy each company is employing.

Your board, with the aid of  the Chief Human Resource Officer, CEO and a knowledgeable independent executive compensation advisor will work through the process of coming to an agreement on the compensation philosophy that best fits your organization.

My advice is to be bold, dive deeper, and ask the hard questions about the business strategy to eventually arrive at the strong foundation level that the executive compensation program will be based upon.

After the compensation philosophy is established the peer group will start to gain clarity on finding the best organizations a company needs to benchmark against.  It’s important to understand that the peer group itself can be used in a few ways.  First is the obvious, the peer group helps to identify market pay levels of similar executive roles within the industry.  Second is perhaps less obvious, and that is that the peer group helps to establish market precedence and pay structure trends.  This is one of the most valuable pieces of information for the board to understand when determining how its executives should be paid.  The peer group can help give clarity on the use of various bonus and incentive awards, such as the general structure of the annual cash bonus plan, the use of stock options, restricted or performance shares, the use of pension and benefits etc.

A deeper dive in the peer group data helps to appreciate where the market is today and where it is heading tomorrow.  The latter of course, is best interpreted from an independent advisor that has a pulse on market trends before they are made public.

Review Executive Compensation

Now that the foundation is laid, and the board and management are in agreement with the overarching compensation philosophy, it’s time to compare current pay levels and structure with the market.

As mentioned earlier, the peer group data is highly valuable in multiple ways.  The independent advisor plays a key role to guide the board through identifying gaps between the current executive compensation program with the compensation philosophy and business strategy.

Depending on the gaps identified, the advisor will need to prepare some stress tested recommendations that will bridge the gap between the current and future executive compensation program.  Here is where a board can get nervous, as it may be reluctant to wake the sleeping giant.  The giant being the mass of shareholders, of course.  However, in order to drive management behaviour and shareholder returns, the compensation program needs to reinforce those behaviours that drive success.  In Amazon’s case, it’s experimentation that leads to life changing technology ~ “Alexa, is the blog almost over?” “Yes, you’re almost done.” ~ and therefore counter to the market norm – rewarding executives using an annual cash bonus. Amazon boldly linked more of the compensation to long-term shareholder value creation by awarding more of the total executive compensation program in equity.

Assess the Business Impact Before Making Final Approvals

Now that the process has clarified the business strategy and its impact on the compensation philosophy and the peer group is examined, the board will face decisions to potentially modify pay levels, pay structure or both.  When the board considers modifications, it is important that the board weighs the impact of those recommendations.  As I reflect upon pay adjustments, I place these adjustments into two broad categories – “opportunity” and “actual”.  The recommendations we make today are nothing more than an opportunity for the executive to receive the compensation.  As we know, it is common that more than 80% of an executive’s pay is at risk, so “opportunity” is nothing more than that.  The “actual” is the real impact on the business financials, share price and dilution levels,  and to the executive.

The board must see a scenario analysis and stress test of the various impacts any compensation adjustments will have today and in the future under various scenarios of success or failure; and the potential financial impacts on the business and shares.

Lastly, the stress test should examine shareholder advisory firm guidelines to focus on potential areas of risk that the compensation arrangements may trigger.

Report the Process and Compensation Results to The Executives and Shareholders via The Annual Proxy

Now to the fun part – reporting.  The board has the duty to shareholders to disclose in “plain language” the executive compensation program.  The fundamentals of great shareholder communication fall into three key categories.  To ascertain if the company’s proxy has done an effective job at communicating and rationalizing the executive compensation to shareholders, the board (at the end of reading their Compensation Discussion & Analysis section of the Proxy) must have a comprehensive understanding of the answer to these three key questions:

  1. How did the executive get compensated?
  2. What is the rationale behind that executive compensation?
  3. How much did the executive receive?

A quick read of Facebook and Amazon’s proxy help to illustrate the rationalization of rewarding pay packages in the echelons of $20+ and $30+ Million (Facebook’s Sheryl Sandberg 2017 reported compensation of $25,196,221 and Amazon’s Andrew Jassy 2017 reported compensation of $35,609,644).  For reference, Facebook passed its last say on pay vote in 2016 with a 91% YES and Amazon passed the say on pay vote in 2018 with a 98% YES.

Remember to examine the performance metrics within the bonus plan, the types of equity used, and if performance conditions are attached to the vesting criteria. The board must understand that even when the future share price is higher or lower than the grant date, the board must be comfortable with the level of pay the executive may receive.

Final Words of Thought

At the end of the day, it is highly unusual for a board to be successfully sued for how much compensation they elected to award to executives. However, that does not mean they will not find themselves under shareholder pressure from time to time.  After all, the board’s best offense is a good defense, and good defense starts with a great fundamental base …  the four steps every Board of Directors should follow when determining executive compensation.

How to Effectively Take Board Meeting Minutes

by | Jul 5, 2018 | Governance, Meeting Effectiveness, Productivity

Tips to Make Minute Taking Efficient & Reliable

The number of times a board meets each year varies and is dependent on each individual board’s goals. Some boards will only meet once – at their annual general meeting (AGM) – and others will meet multiple times. Regardless of how many times a board meets, one task is universal throughout all board rooms. During each meeting, board meeting minutes are recorded.

Board meeting minutes are an official record of what occurs during the meeting. The role  of minute-taker is of utmost importance, and typically the Company Secretary does most of the writing and recording of the minutes. However, it is up to the remaining board members to review the minutes and make sure that the record accurately depicts their intentions.

Why are Board Meeting Minutes Important?

It is vital for a board to understand the importance of meeting minutes. Meeting minutes are the historical record of a board’s plans – short and long-term. Furthermore, meeting minutes assist in interactions with the IRS. The IRS or auditors have the power to challenge the record and compare it with tax returns. Having accurate records are necessary, especially since meeting minutes may be used as evidence, in court.

Planning and Preparing for Meetings

To avoid playing catch-up during a meeting, the minute-taker can benefit tremendously from using a template for following along in the meeting. It’s essential for company secretaries to budget enough time to prepare and plan for the meeting. Several meeting minutes can be pre-filled, such as location, meeting type, date, time and attendance (if the minute-taker or the Board Chair has a list of those who said they were coming and those who said they couldn’t attend). It is also important to record the start time of the meeting and the name of the person who is acting as minute-taker and recording and transcribing the minutes.

Taking the Board Meeting Minutes

Minute-takers must know what types of information should be reflected on the record. In essence, meeting minutes drive the needed actions of the board members and they detail the board’s expectations of who needs to take action; what they need to do; and when they will complete their tasks.

How to Build & Motivate High Performance Investment Teams

by | Jul 5, 2018 | Executive Compensation, Governance, Pension Funds

A Summary of Our Presentation at the NCPERS Conference

Global Governance Advisors recently presented at the annual NCPERS conference for public pension Chief Investment Officers (CIOs) on how to build and motivate high performance investment teams.

Two Aspects of Building High-Performance Teams

The presentation focused on two critical points:

  1. Ensure that the compensation plan’s offering is fair and/or competitive to attract and retain key personnel.
  2. Establish an “at-risk pay” plan that effectively acknowledges and rewards investment staff for performance and contribution toward achieving higher returns for their pension funds.

Public pensions throughout North America need investment professionals to help manage the trillions of collective dollars with which they are intrusted. Public Pensions are competing with a private sector financial community that historically pays their employees at highly competitive compensation levels. The success of working in this sector is easily reflected in the 2018 Forbes World’s Billionaires list where 14% made their fortunes in the finance and investments industry – the highest-ranking industry represented in this list. It’s important to understand what other public funds are doing in the way of competing in the private market of pension compensation.

Positively designed “at-risk” incentive plans are easy ways to be competitive, reward employees for their performance, and mitigate risk. In the compensation world, the total opportunity is what is most important. By providing a reasonable base salary public fund boards can supplement salary with an incentive that will only pay out if positive results/performance is achieved.

What is the value to the fund if the performance increases by 5%, 10%, 20% or more? And, is that increased performance worth additional compensation?

Working in both the public and private sectors, GGA recognizes that public perception and headline risk are real obstacles for public pensions. As a result, public pensions will struggle to be competitive if they do not arm themselves with the objective facts. A few years ago, one of our clients struggled with higher than normal attrition; as well as difficulties hiring new investment staff. They theorized that they were not competitive nationally and were especially not competitive in their local community where several large public funds competed for talent.

They too, were straddled with public pressures and publicly dictated pay bands but wanted to objectively investigate their overall competitiveness. On behalf of this client, GGA conducted a nation-wide custom compensation survey and determined that their investment team positions were below the national levels for similar positions within public pensions. More importantly, the study showed that not only were they below the national levels, they were substantially below the compensation levels offered within their own community. Now, armed with current objective data, they were able to argue the case that adjustments were required if they were to continue to managing billions of dollars on their members’ behalf. The resulting increase in performance changed the fortunes of the fund.

At no point do we claim that it is easy for public funds to raise their compensation levels or implement incentive plans. However, if boards of trustees and executive teams throw up their hands and claim defeat before they try to proactively manage their teams, then they will continue to lose staff or fail to attract and retain the skilled professionals they need to grow their fund’s assets and protect the financial well-being of their members. Building your arguments on current objective facts and calculating how at-risk incentives can drive performance and higher returns will only strengthen your case and get you what you need to be successful.