The Advisors' Blog

– Lynn Jokela

One aspect of CEO succession that you don’t read a lot about is the effectiveness of steps taken to help ensure retention of other senior leaders.  To help limit post-CEO succession turnover, companies sometimes make special retention grants to other senior leaders.  A helpful FW Cook memo examines the effectiveness of this strategy and found retention grants can help minimize departures within one or two years of a CEO succession, but they’re not a permanent solution.

In analyzing the effectiveness of retention grants, FW Cook looked at large-cap companies with CEO turnover from 2010 – 2016.  The study sample included 65 companies and of those, approximately 40% made succession-related retention grants to non-CEO NEOs.  It found NEOs receiving retention grants were most likely to stay with the organization for the first two years following a CEO transition compared to those who don’t receive them.  Here’s some of the study’s other findings:

– Among grant receivers, the most common departure point was in the third year after the succession (33% of those who left within the first five years, and 29% of all who eventually departed) suggesting that NEOs will often leave a company after receiving the entirety of an award with a three-year vest or majority of an award with a five-year pro-rated vest.

– In contrast, among grant non-receivers, the most common departure point was within one year of CEO succession (28% of those who left within the first five years, and 16% of all who eventually departed). Our research found that departure rates for non-receivers show a steady downward trend through five years, suggesting that stability of the leadership team is most tenuous in the initial year of a transition, and special one-time awards may provide an effective retention tool during that time.

– When it comes to the value of the grant, the study found the more valuable the grant, the stronger its ability to retain – but the ability to do so levels off once the grants pass the $2 million mark.

Although retention grants don’t keep some leaders around forever, they do promote organizational stability and allow time to develop leaders within an organization.  The memo notes several other factors that of course play into whether an executive decides to stay following a CEO succession – and suggests as fodder for a future study possibly exploring the correlation between outstanding equity value and retention results.