The Advisors' Blog

This blog features wisdom from respected compensation consultants and lawyers

December 16, 2024

CEO Pay: Planning for Retirement

While a majority of companies don’t modify their CEO’s LTI vehicle mix or vesting schedules in the years leading up to retirement, this WTW memo makes the case for taking steps to “optimize” a CEO’s compensation before their pre-retirement years. Staying the course may not make much sense at a point when a CEO is a few years from retirement.

For example, assume a CEO annually receives grants comprised of PSUs (50%), stock options (30%) and RSUs (20%). Stock options with a standard 10-year term would be “out of sync with the remaining tenure” and don’t really have the intended effect of aligning the CEO’s interests with those of the company and shareholders.

After projecting the timeframe to retirement, assessing current equity award terms and estimating the value of in-flight awards that will be prorated or truncated, the article notes a few example alternatives to consider:

– A larger final equity grant made two or three years before retirement could continue to align your CEO’s pay with their final-years performance while effectively avoiding proration, truncation and/or lost value.

– A special performance-based grant could help to underscore and celebrate achievements toward the end of the CEO’s successful tenure.

– A change to the equity pay mix and/or vesting period could help to do the same.

In the above example, the article says, “it would be reasonable to grant no more stock options to the retiring CEO, while delivering final grants via PSUs and/or RSUs.”

Meredith Ervine