The Advisors' Blog

– Liz Dunshee

It’s not uncommon for a company’s stock price to drop when a successful CEO departs, even if you’ve previously disclosed the succession plan. This NACD blog says you should anticipate the market reaction to these events – and there’s an easy way to avoid penalizing the new CEO. Here’s an excerpt:

There’s an important executive compensation point to interject here: as you set up pay plans for a new CEO, structure equity incentives so they are based on the stock price after the market has absorbed the bulk of the hit to the share price. There have been numerous circumstances where options are granted immediately upon a promotion, yet within a few days, the value of those options are 10-15 percent underwater. This is demoralizing to the successor and does not achieve the supposed aim of your incentive plan.