The Advisors' Blog

One of the many challenges that boards may encounter with succession planning is that an aging CEO may not want to leave. Sometimes, that’s because a high-powered exec isn’t ready to downshift into retirement. This Meridian memo points out that separation agreements may also encourage some executives to overstay their welcome. Here’s the intro:

In particular, retirement-eligible executives may find that an involuntary termination without cause produces a more favorable monetary outcome than voluntary retirement. In some cases, executives may also seek to receive cash severance benefits available under employment agreements or severance plans while simultaneously benefiting from the more favorable retirement treatment of equity contained in their equity award agreements.

While rarely intentional, this “double-dipping” or “best of both worlds” outcome can create incentives for executives to remain employed until the company initiates a separation rather than voluntarily retire in support of succession planning objectives.

The memo lays out specific examples to illustrate how some arrangements may unintentionally cause executives to delay retirement – leading to succession challenges, higher separation costs, extended transitions, and unnecessary tension. It explains that the key lies in considering all arrangements holistically:

Viewed independently, both severance and retirement provisions may appear reasonable. The challenge emerges when companies fail to evaluate how these arrangements interact once an executive becomes retirement eligible.

The Meridian team suggests that boards and compensation committees consider these questions:

• Are current arrangements creating incentives to delay retirement?

• Would a retirement-eligible executive be financially better off waiting to be terminated than
voluntarily retiring?

• Could executives receive both cash severance and retirement treatment on equity awards following an involuntary termination under the company’s current plan and award language?

• Is the company relying excessively on ad hoc or discretionary solutions?

• Does the overall framework support the succession planning objectives the company is attempting
to achieve?

– Liz Dunshee