To: Consultant’s Corner Participants
What are the key ingredients or best practices, in your opinion, when it comes to succession planning?
From: Jannice L. Koors, Managing Director, Pearl Meyer & Partners, Chicago
Pearl Meyer & Partners just completed a survey on CEO succession planning. While the survey focused on the CEO position, the succession planning implications can certainly cascade throughout an organization. One of the biggest concerns expressed by the respondents was that internal candidates not selected might leave the company. Such a talent drain can weaken the company’s management ranks and cause further succession challenges. Yet these concerns can be mitigated with proactive planning.
First, boards should make realistic individual assessments of the “also-rans.” Are they all equally critical for retention? Do their individual career aspirations preclude a continued productive role in the company?
Once retention priorities are determined, the company can then consider several effective compensation tools, such as additional equity grants with back-loaded vesting or cash-based retention awards with claw back provisions. Care should be taken to avoid too much emphasis on base salary adjustments, as these can create problems with internal equity and future senior executive recruitment. Compensation isn’t the only important factor; the company can consider organizational changes to provide new or expanded responsibilities to the runners-up as a visible, public sign of their continued value to the organization.
From: Daniel J. Ryterband, President, Frederic W. Cook & Co., Inc., New York
Succession planning, particularly for the CEO position, is among the most important corporate governance functions. Developing internal candidates reduces the risk of failure and the disruption that often accompanies the integration of externally sourced talent. In addition, internal promotion is almost always less expensive. Having a supply of internal candidates for critical leadership roles requires an outstanding management development program and a compensation system that functions to retain key talent. Interestingly, companies recognized for their management development capabilities often face an intensified risk of undesired attrition, which magnifies the importance of effective compensation design. The compensation systems that are most effective in supporting retention typically share two common attributes. The first is the ability (and willingness) to differentiate compensation to reflect performance. The second is the ability to balance compensation between short-term payouts and long-term wealth creation. Programs overly focused on the short-term tend to create a free-agency mindset, which can foster turnover when operational performance slips or the stock price depreciates. Conversely, balanced programs ensure that wealth-creation opportunity is dependent on a combination of short-term payouts, longer-term changes in shareholder value, and career employment.
From: Doug Friske, Managing Principal, Towers Watson, Chicago
Best practices in succession planning, and broader talent mobility,include rigor and thoughtfulness around four key elements: Identification: This requires being clear on who you will treat as talent (Only senior leaders? Individuals early on in their careers?) and how you will identify talent (Traditional performance and potential, or broader elements like learning agility, critical competencies, ambition?). Development: This involves using assignment management to build leaders through experiential learning, including providing cross-functional and cross-border opportunities and being mindful of the types of role changes (scope, specialty, and location), to mitigate transition risk. Deployment: This is about building the right infrastructure and process to be able to move the right skills to the right place at the right time. Specific activities include defining and communicating career paths and role profiles, building a talent “ecosystem,” and making room for emerging talent by creating organizational gaps. Track Plans & Measure: Analytics and planning help identify and shape appropriate talent-management solutions. Best practice succession planning has the right metrics in place to help determine the real value and impact of your organization’s programs.
From: Joseph M. Yaffe, Partner, Skadden, Palo Alto
It sounds simple, but the first step in developing an effective succession plan is to recognize the need to focus on CEO and
senior-executive succession plans in advance—not after the factor when the plan has failed. An untimely (or no) succession plan subjects the board of directors to reputational risk and the company to a potential loss in market value. The absence of a succession plan places stress on a process that is best implemented on a “clear day,” not when the board is under direct scrutiny from shareholders regarding CEO or senior executive succession. Best practices for developing a succession plan include: (1) clear articulation of who is responsible for the process, including participation by the CEO and external advisors; (2) a commitment to at least annually review the plan; and (3) the identification of multiple candidates, depending on the succession scenario being addressed.
From: Lorraine Stomski, Ph.D., Senior Vice President, Aon Hewitt, New York
In Aon Hewitt’s global research study, Top Companies for Leaders, we examined the best practices of top-performing companies and their leadership practices, including succession planning. Through our research, we’ve found the following trends in successful firms: • Senior leaders take active ownership of the leadership/people agenda—including
succession planning.
• Succession plans are clearly driven by business strategy.
• Talent is more often built than bought (75% internal, 25% external).
• Succession plans are used to fill 90% of vacant leadership positions.
• Succession readiness is an honest and accurate evaluation (not a “stretch”).
• Companies focus on multiple levels in the organization and identify pivotal roles.
• Two to three years after a role is filled by a successor, organizations will measure the effectiveness of his or her selection, and whether their original assessment of that candidate’s capabilities was correct.
• An emergency succession plan has been developed for the top one or two jobs. Additionally, as we emerge from the recession, there are some competencies and attributes that are becoming more critical than ever to assess for and monitor as part of the succession planning process:
• The ability to lead through rapid and complex change
• Optimism and resiliency — the ability to overcome challenges and obstacles and help others do so as well
• Learning agility — the ability to learn from experience and apply those lessons moving forward
