Navigating transitional CEO pay when time is of the essence

In preparation for retirement, suppose your CEO said they would be stepping down within the next 12 months. However, they also said they might be willing to stay with the company after retirement to assist with CEO succession or serve as a strategic advisor as the next CEO settles into the role.

We already have discussed long-term planning strategies for CEO succession when you have years to plan your strategy. However, in the circumstances described above, different alternatives in compensation arrangements may be required.

Four approaches to transitional CEO pay

Organizations tend to adopt one of four primary approaches when dealing with a transitioning CEO. The final choices depend on whether the executive will remain as an employee (not yet retired) or will retire (no longer an employee) (Table 1).

Figure 1. Four primary approaches to transitional CEO pay

fullscreenEnlarge this table

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.

Extraordinarily high pay may result from various scenarios, including a CEO resigning from their role and, through a resignation agreement, serving as an advisor for a year during which they cash out millions of dollars’ worth of equity. Another scenario may include a CEO taking on an executive chair role and receiving additional equity grants for such service.

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.

Other key observations:

• The initial term of transitional agreements typically ranges from 18 to 24 months, though it can vary from three to 36 months. Restrictive covenants (e.g., non-compete, non-solicit, confidentiality, non-disparagement 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 rule (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 of directors. Less common duties involve:
  • Continuing as CEO while helping with the transition to the successor
  • Strategic transactions
  • 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
  • Half (50%) of the individual’s base salary as of retirement date and contribution of other benefits
  • Around 25% of the monthly base salary as of retirement date plus target bonus rate in effect as of retirement date (pro-rated 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:

1. 01

   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?

2. 02

   Review 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 business objectives.

3. 03

   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.

Authors

---

Kate King

Director, Executive Compensation (Seattle)

email Email

---

Josephine Gartrell, J.D.

Managing Director, Work & Rewards

email Email

---

Michael Oclaray

Senior Director, Executive Compensation and Board Advisory

email Email phone +1 818 445 8720

---