The Secret to Successful CEO Succession

“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.

Written by Paul Gryglewicz

Aug 15, 2018

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