The Advisors' Blog

CEO transitions are tough. But when other management changes immediately follow, an otherwise difficult (but not uncommon) event in a company’s history can turn into an unprecedented period of upheaval. Some boards try to avoid this with one-time grants to other members of the C-suite. Five years ago, FW Cook assessed the retentive effect of these grants and recently revisited the topic with an update to its prior study, which now also considers the retentive value of existing equity awards. Here’s an excerpt:

Our prior study found that special one-time equity grants made to the leadership team have a strong retention effect in the short term, but that the effect wanes quickly.

The findings in our updated study are largely aligned with those of the original analysis. Particularly, special equity grants made to non-CEO executives in the wake of CEO turnover continue to show a strong, but limited, retentive effect – typically lasting approximately two to three years. Prevalence and design of such awards remain consistent, although the dollar value of such awards has increased materially.

Both the original and updated studies show that the retentive power of special equity grants is strongest in the three year window following CEO turnover. Among NEOs who eventually depart the company, those who did not receive such a grant typically leave within the first year, while those who do receive a grant typically do so at year three – aligned with the most common vesting period of retention awards.

With additional data analyzed in this study, it also uncovered some new findings.

– Non-CEO executive grants are twice as common when the CEO is an external hire.

– A correlation between total outstanding equity and length of retention was identified, regardless of whether special retention grants were made.

These grants are made by a minority of companies (36%), but based on these findings, it sounds like you may want to seriously consider them if:

– Your incoming CEO is an external hire;

– Non-CEO NEOs do not already have significant unvested equity; and

– The company will benefit from extending retention from 1 year (the average tenure post-CEO turnover without retention awards) to 3 years (the average tenure post-CEO turnover with retention awards).

– Meredith Ervine