Ways to Address Transitional CEO Pay When Time Is of the Essence

Suppose your CEO said that they will step down within the next 12 months in preparation for retirement. However, they may be willing to stay with the organization following retirement to assist with CEO succession or serve as a strategic advisor as the next leader settles into the role.

In a previous Workspan Daily article, we discussed long-term planning strategies for CEO succession, when you have years to plan out your strategy. However, in the circumstance described above, different alternatives in compensation arrangements may be required.

Four Primary Approaches to Transitional CEO Pay

We have found that organizations tend to adopt one of four primary approaches when dealing with a transitioning CEO. Their choices depend on whether the executive will remain an employee (not yet retired) or will retire (no longer an employee) (Figure 1).

Market Observations

We analyzed post-CEO transition pay disclosures that represent various arrangements in the market. There is a wide range of observed practices, from a service period that allows for continued equity vesting (with no additional payments) to extraordinarily high pay that can be challenging to justify. The middle ground and more common arrangement is to pay a set cash fee, depending on the time they can commit during the service period.

Our key observations include:

• The initial term of transitional agreements typically ranges from 18 to 24 months, though it can vary from three months to 36 months. Restrictive covenants such as noncompete, nonsolicitation, confidentiality and nondisparagement clauses are common, usually covering a period of at least one year.
• The role assumed by an outgoing CEO during transition is often as a strategic advisor or consultant, with expected time commitments articulated in the role (e.g., ranging from 25 to 40 hours per month).
• Duties typically involve succession planning, strategic services and other tasks as requested by the board. Less common duties involve:
  • Continuing as CEO while helping with the transition to the successor;
  • Strategic transactions; and/or,
  • Governmental affairs or other regulatory matters.
• Compensation arrangements vary widely, depending on the level of involvement and/or time commitment. Certain compensation arrangements we recently observed are:
• No incremental compensation provided. Continued service allows for full vesting of outstanding equity grants.
• Modest monthly base retainer or annual salary.
• Fifty percent of the individual’s base salary as of the retirement date and continuation of other benefits.
• Around 25% of the monthly base salary as of the retirement date plus a target bonus rate in effect as of the retirement date (prorated to reflect the monthly rate).

Considerations for HR Leaders and Compensation Committees

If your CEO wants to step down within a year, you should immediately consider these key factors:

• Role definition. Determine the role the outgoing CEO will have and the corresponding compensation arrangement. Does their desired role fall into the four primary approaches?
• Review the retirement plan documents. Make sure you understand how equity is treated upon early and normal retirement, and that your definitions are competitive with contemporary market practices and aligned with your business objectives.
• Compensation alignment. Based on the anticipated retirement date, assess whether the potential realizable value of any prorated or truncated awards corresponds with the executive’s pay expectations, and the behaviors and decision making you want to reward in their final months as CEO.

Navigating CEO transitional pay can be complicated, particularly when time is of the essence. However, with expert guidance tailored to your organization, you can develop compensation arrangements that are fair, competitive and aligned with your broader strategy.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Executive Compensation
• Finance and Budgeting