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Article | Executive Pay Memo North America

Your CEO is gone. Now what? Interim leaders bring critical pay decisions

By Theresa Tovar , Robert Newbury , Michael Oclaray and Marie Holmstrom | September 26, 2024

Companies without an immediate CEO successor must consider several nuances when setting pay for an interim leader.
Executive Compensation
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In an ideal world, companies would always appoint a permanent CEO for the long run by following a well-thought succession plan. However, the world is an imperfect place, and circumstances sometimes require quick action and an interim solution. Not having a leader in our current competitive and fast-paced corporate landscape creates lasting ripple effects that can be felt for years.

When companies find themselves without an immediate CEO successor – whether because a successor was not previously identified or a designated successor is not ready in a sudden emergency – an interim CEO must be appointed. Typically, the interim CEO provides operational stability and expertise while the board conducts due diligence in searching for and selecting a permanent CEO who will design and lead the organization’s future.

The role of interim CEO is unique in every organization, and there are important nuances to consider when setting interim-CEO pay:

  • Is the appointed individual from the executive team or board of directors?
  • What is the anticipated duration of interim service?
  • What overall contributions are expected from the interim CEO?
  • Which pay elements will be provided?
  • Will incentives or stock compensation vesting be aligned with – or differ from – the company’s standard executive pay program?

Assessing the company’s unique situation will help in setting the most appropriate compensation package. In turn, we tend to see a wide range of compensation packages in terms of structure and quantum, as they are situation specific.

Considerations for selecting the interim CEO

Several key decisions are required when appointing an interim CEO, and each one helps inform the compensation package.

Succession management

The process for identifying a temporary CEO should be set before an unexpected vacancy triggers the need for a replacement. Having a thorough succession management process – including a future-focused CEO success profile, an emergency succession plan and internal candidate readiness assessments – is key to being ready for identifying candidates for interim CEO from both inside and outside the company. In addition, having a robust CEO onboarding process will be critical as well to ensure the success of the interim CEO.

Service and duration assessment

Length of service depends on the circumstances that have created the temporary vacancy. Interim CEOs serve in the position for as few as five days and for as long as two years. Based on our research, interim CEOs serve for five months on average.

An interim CEO may serve only to ensure smooth operation of the company until a permanent CEO takes over. Alternatively, an interim CEO may be required to undertake additional responsibilities such as initiation of new projects or directing the organization toward stronger financial and operational positions. Understanding the interim CEO’s priorities and anticipated length of service helps guide decisions related to their pay structure.

Every day, these factors help inform organizations about who will be selected for the role of interim CEO, and how they will be paid. WTW’s Global Executive Compensation Analysis Team (GECAT) reviewed the public filings of S&P 1500 companies that appointed interim CEOs between 2019-2023. (Note: Proxies filed during any given year reflect compensation and decisions made the previous year. The most current full year of proxy disclosure at the time of this writing was 2023.)

Through this analysis, we identified 142 instances of interim CEOs (excluding company founders who transitioned into the role).

Who is serving as interim CEO, and how they are paid

Unsurprisingly, those chosen to take on the interim CEO role have a specific set of abilities, a track record of success in business and leadership experience:

  • Executive in role other than CEO. 55% came from the company’s executive team.
  • Board member. 39% were board members.
  • Former CEO. 10% have prior experience running the company, as they previously served as the company’s CEO and have unmatched perspective and experience managing the company. These former CEOs also had positions as directors, non-executive chairs and executive chairs before becoming interim CEO.
  • Outside recruit. 6% were outside recruits.

Our analysis focuses on interim CEOs who come from the executive team or board of directors. It excludes outside recruits, who typically are selected because the company may be experiencing a shock event or turnaround situation that requires external leadership.

Executive officers as interim CEO

When a company finds itself without a CEO, 55% select a named executive officer (NEO). Prior to being named interim CEO, more than one-third of these NEOs held the position of CFO (Figure 1).

Having been a member of the former CEO’s internal team, an NEO possesses the ability to promptly assume CEO responsibilities temporarily and deal with the organization’s immediate challenges. Compared with pay of the former CEO, 77% of named interim CEOs earned at median:

  • 53% of the total direct compensation
  • 82% of salary
  • 37% of long-term incentives (LTIs)

The other 23% did not receive additional compensation for their temporary service; however, 80% served in the interim CEO role for 3 months or fewer.

Non-executive board members as interim CEO

When executive candidates are unavailable or not ready to take the helm even temporarily, it is common to appoint an interim CEO from the company’s board of directors. Board members are well-versed in the company’s business strategy and current situation, and they tend to have established relationships with other executive officers.

When the interim CEO is selected from the board, a non-executive director who is not the board chair most frequently fills the role (Figure 2). In our experience, non-executive directors are selected because of uniquely important experience, such as having been a CEO at another company within the same industry.

Having worked directly with the company’s prior CEO, the non-executive board chair can be a sound alternative to fill the interim CEO post. Of directors who were appointed interim CEO, 38% were the non-executive board chair.

Moving from the board to an interim executive position includes a new title and new compensation. Pay for a non-employee director serving as interim CEO switches from typical board pay – generally comprising cash and equity retainers – to compensation that more closely mirrors that of the executive team.

Among directors serving as interim CEO, 88% received compensation in recognition for their service. At the median, directors serving as interim CEO received $1.3 million cash compensation (cash plus bonus).

In several cases, director interim CEOs received higher fixed pay compared with the outgoing CEO’s pay, to offset limited participation in incentive programs (e.g., just 29% of directors participated in the company’s annual incentive plan). However, 22% received a special bonus; these were provided for either signing-on to serve as interim CEO or for the successful completion of the interim service. The median value for this special bonus was $500,000.

In addition to cash compensation, directors received $1.5 million in stock-based compensation at the median. Ninety-one percent of stock compensation received was in the form of restricted stock/restricted stock units (RSUs), most commonly cliff-vesting after one year. While restricted stock/RSUs were the most prevalent vehicle, 20% of interim CEOs were granted stock options and another 14% were granted performance-based LTIs (Figure 3).

Figure 3. Interim CEO compensation vs. former CEO compensation
Ratio of interim pay to former CEO pay Prevalence of interim CEO: board Ratio of interim pay to former CEO pay Prevalence of interim CEO: executive
Cash compensation
Base salary 100% 98% 82% 100%
Bonus 100% 31% 52% 93%
Total cash 66% 98% 65% 100%

Total stock compensation 20% 71% 37% 96%
Total direct compensation 44% 100% 53% 100%

Note: All compensation used to calculate ratios have been annualized and reflect median values.
Source: WTW Global Executive Compensation Analysis Team review of public filings of S&P 1500 companies

Set your organization up for smooth sailing

Interim-CEO compensation can vary significantly depending on the company’s demands and circumstances (including the anticipated time horizon) as well as the qualifications and expertise of the incoming interim CEO. Knowing the ratio of interim CEO pay to former CEO pay best allows the company to structure interim compensation – and allows for deviations from the median when necessary.

While you hope to not encounter an unexpected interim CEO situation, the reality is that such situations take place – as some of your company’s board members may have experienced at other companies. Be prepared and have a game plan in place.

  1. Ensure the board has established CEO succession management for not only planned transitions but also quick and unexpected vacancies. Build the leadership pipeline and implement succession management through three key phases: (i) year-over-year succession planning, (ii) search and selection and (iii) transition and onboarding. In preparation for an unexpected vacancy, have in place a current CEO success profile, a CEO emergency succession plan and readiness assessments of possible interim candidates.
  2. Determine answers to important questions of “who?” and “for how long?” Determine the anticipated duration of interim service and whether the interim CEO will be an existing member of the executive officer team or a non-employee director of the board (or an external hire, if necessary).
  3. Establish overall contribution expectations and agree on guiding principles for compensating the interim CEO, grounded in organization stewardship and overarching principles of executive pay: purpose, alignment, accountability and engagement. Guiding principles and building consensus about expectations of the interim CEO will lead you to the best-fit mix and quantum of pay components and degree to which incentive-based pay and/or stock compensation vesting will be aligned the company’s normal approach to executive pay.
  4. Prepare to be agile. The best laid plans do not always work out as anticipated. Be ready to pivot on the individual and on the compensation arrangement. In structuring the pay package, be thoughtful to avoid investor or proxy advisor criticism at a time when the organization can least afford more external scrutiny.

A version of this article appeared in Workspan on September 19, 2024. All rights reserved, reprinted with permission.

Authors

Director, Global Executive Compensation AnalysisTeam
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Senior Director, Global Executive Compensation Analysis Team (Columbus)
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Senior Director, Executive Compensation and Board Advisory (Los Angeles)
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Senior Director, Health, Wealth & Career
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