The Advisors' Blog

Some investors view CEO succession planning as the Board’s most important responsibility. In fact, in its voting guidelines for 2024 annual meetings, BlackRock called out that it might vote against the members of the responsible committee where there is significant concern on this topic. We’ve noted that a number of companies include succession-related metrics to compensation programs to incentivize planning. This Directors & Boards article shares a reminder that it also may be appropriate for compensation committees to pay a premium to up-and-coming internal candidates who might otherwise be recruited away. Here’s an excerpt:

Ensure compensation supports succession plans. Over the past decade, compensation committees increasingly have broader responsibilities and, in many cases, that includes oversight of executive succession. It is important for the committee to consider succession plans when weighing executive pay decisions. For example, if an executive is one of the candidates to succeed the CEO, it is likely appropriate to pay that executive at a premium to market for their current role. The committee should also review retention handcuffs for talent that is most critical for succession planning.

One retention risk approach to consider is conducting a “next job” analysis. This analysis considers what a current executive could potentially be paid if they left their current company for a higher-level position at another company. For example, knowing how much the head of a large business unit could make as a CEO of a smaller stand-alone company can give an important frame of reference for retention risk. While ISS and Glass Lewis may be critical of special retention awards, the greater risk to the company may be losing essential talent because there was not enough retention “glue” holding them in place.

Even if the proxy advisors aren’t thrilled, retention awards may draw relatively less ire if they are granted only to executives other than the CEO, and you may be able to get shareholders on board if they are framed as an element of succession planning. If you’re not sure what to say about succession planning, you’re not alone – check out Meredith’s blog on TheCorporateCounsel.net about the significant variations in discussing the elements of this process.

– Liz Dunshee