Six Steps to Best-Practice Succession Planning

From intense media scrutiny to a volatile financial environment, organizations face some of the biggest challenges in decades. But there’s one other concern getting little media exposure. Yet it represents a critical issue over the next several years: the exodus of top leadership.

Why the exodus? Retirement, termination, and an improved job market to name a few. As noted in a recent post of ours, Why Companies Lose Their Best Talent─How To Hold Onto Yours, across the country, CEO departures surged to a 24-month high in January, up 19 percent, as some 131 C-suite leaders announced they’re leaving their posts, according to Challenger Gray & Christmas, Inc.

Are you prepared to face the loss of your leadership team if it packs its bags and heads out the door for a better opportunity?

Experience shows that failing to create and follow a succession plan jeopardizes business continuity, employee morale, shareholder relationships, and stock value. Worse yet, not having a succession plan can result in a loss of customers, and an increased risk of acquisition.

Organizations that incorporate succession planning as part of its critical governance are better positioned to retain a strong management team and remain industry leaders in the future. Of the 28 million businesses in America1, 90 percent of which are closely held, less than 30 percent have a succession plan2. Most companies don’t give succession planning the attention it deserves.

But it’s not that difficult to do.

We believe that within six key steps, you can create a successful succession plan.

1. Adopt a Preemptive Attitude

It pays to be proactive when it comes to developing a succession plan. Don’t wait until a vacancy occurs to start talking about your succession plan. You should be planning at least three to five years in advance of a transition.

Don’t make a quick decision on an internal candidate who isn’t ready for the job or may not be the right choice for the role. On the flip side, a knee-jerk reaction to an external candidate who is unaware of your organization’s long-term needs could also prove to be a bad decision.

Start your planning early. Adjust it as needed so if someone leaves, you’ll have your plan in place.

2. Stay on Strategy

The past isn’t always your most reliable predictor of your future success. Don’t fall back on your previous selection criteria; succession planning needs to be part of your overall strategic planning process.

By keeping your eye on your strategic plan, you can identify the leadership traits that will be needed to achieve your goals. Use the current set of criteria to access and develop leadership so that when a vacancy occurs, your organization will have identified your true needs and will be ready to assess your internal and external candidates against those needs.

This approach enables you to take a proactive stance to identify and address any individual or organizational skill gaps and develop your leadership team.

3. Don’t Plan in a Vacuum

The best succession plans are never based on the opinions of a handful of people. Even though the board is ultimately responsible for succession of the CEO and directors, the process is often overseen by the governance or compensation committees.

Expand your planning to include the current CEO and members of senior management who can provide valuable insights on your organization’s leadership needs. Don’t rule out outside facilitators who can be helpful in conducting confidential interviews with board and management to access internal executives and identify qualified external candidates.

In our business, we commonly advise clients on the executive benefit programs that come into play in the retention and retirement plans of key executives, such as Nonqualified Deferred Compensation Plans and Supplemental Executive Retirement Plans.

These plans (and the accounting and funding of them) need to be reviewed to ensure that the objectives align with the strategy of a succession plan:

What is the departing executive owed when he exits? Does the incoming executive receive the same executive benefit? Does each executive receive the same plan or is it tailored? These and other critical questions require attention in a successful succession plan.

4. Match Successor to Your Needs

Customize your plan so it works in identifying the key talent needed for your organization and your corporate structure. Don’t assume that certain positions are a natural fit for a current opening.

Many organizations assume that the natural successor to the CEO would be its chief operating officer. But keep in mind, these two positions have decidedly different strengths. COOs focus on day-to-day internal organization operations while CEOs must be more externally focused. COOs tend to be more tactically driven while CEOs follow a more strategic vision. They work and think differently, so don’t assume that your COO is ready─or even wants—the top job.

Another mistake companies often make is to identify a successor too soon in the process. Carefully vet each candidate before releasing any information outside the organization. And then carefully manage the communication process to protect the organization and the potential successor.

5. Look Outside

Organizations don’t typically like change. That thinking naturally leads to organizations looking internally for candidates who can preserve the institution’s culture. Internal candidates tend to be less risky─you know what makes them tick; plus, they are less costly than external candidates.

But take an honest look inside your organization and see if your current leadership has the critical thinking and core talents you need to get your organization to the next level. An external candidate may bring a different set of capabilities and a fresh perspective on your organization that is more aligned to your future needs.

Regardless of whether the candidate is internal or external, ask each to present to the board their plan for addressing the organization’s strategic challenges and plan for the future. You’ll be able to interact with different candidates and view their strengths and compare their strategic vision with their competition.

6. Build Leaders

Leaders don’t just appear. Organizations need to invest in developing and assessing the skills of their most promising executives. Take the time to understand the strengths of your current leadership team, and then create opportunities that will prepare them for their next position within the organization.

Besides building organizational bench strength, leadership training, and development programs provide meaningful opportunities for career growth that promotes the type of positive company culture that attracts and retains top talent.

Several people need to be accountable for ongoing career development–from the board, the CEO and human resources. This approach ensures that the process defines critical competencies, skill and knowledge needed for leadership roles and continuously develops employees in key areas.

Identify high-potential employees early in their careers and provide them with the challenges and training to prepare them for larger roles. You’ll secure your future by adopting this approach to retention, as well.

A Critical Element of Business Success

Succession planning is an ongoing process of dialogue and review that’s continually re-evaluated, adjusted and updated to suit your organization’s evolving needs. Succession planning must sit at the center of any annual strategic planning done within your organization.

With so many challenges facing Corporate America, it is imperative to be proactive when developing a succession plan that works. Organizations that invest the time and effort needed for effective succession planning will have the strongest likelihood of sustained success.

To Your Success,
Trevor Lattin, Managing Director
Phone: 949-514-8738
Cell: 949-306-5617

Why Companies Lose Their Best Talent How to Hold onto Yours

Whether it’s a well-known global brand, a fast-track organization or an established conglomerate, companies face the challenge of keeping their best performers and brightest employees.

There’s a shakeup at the top echelons of business as executive turnover continues to increase. Everything from banking to the energy sector is experiencing the pressure of this uptick.

Challenger Gray & Christmas Inc. cite a 19 percent increase in CEO departures in January of this year. Why are so many executives leaving the boardrooms and hitting the bricks?

From bureaucracy to shifting priorities, lack of accountability to limited career development─all of these factors drive employees out the door. Top talent isn’t driven by money alone, but rather by the opportunity to contribute significant achievements and be part of something meaningful that expresses its passion.

Move Over Boomers?

A recent study by Deloitte reveals the primary incentives preferred by executives as of 2012: Generation X executives (ages 32 to 47) rank additional bonuses or incentives as number one while strong leadership from top management and compensation round out their top three incentives. Baby Boomer executives (ages 48 to 65) find additional benefits play a more significant role than financial incentives.

Additionally, 10,000 Baby Boomers turn 65 years old every day until 2030. Baby Boomers are the most experienced workforce, and make up most of the executive talent in the U.S. today.

The next youngest group in the workforce, Generation X, does not have nearly the human capital numbers to fill the vacuum created by the Baby Boomers’ eventual workplace exit.

The Millennial generation, the youngest sector of the workforce, is as large as the Baby Boomers, and will be increasingly driving the economy with its consumer spending over the next 20 years.

The lackluster economy of the last few years and its effect on retirement account balances has caused Baby Boomers to work longer than imagined. While we can’t control these population trends, they are critical to consider when creating your retention strategies.

Know Your People, Know Their Issues

The first step in retaining key people is simply to talk to them. Learn their key issues and priorities. Consider the demographics and address their needs appropriately. Make these three main points the cornerstone of your retention strategy:

  • 1. Review your compensation and benefits philosophy. Review your salary structure and benefits programs to ensure they’re competitive and attractive enough to retain key employees and future talent.
  • 2. Follow the leaders. Fortune 1000 companies use best practice, creative executive benefits strategies that include non-qualified deferred compensation plans and supplemental executive retirement plans.
  • 3. Consider opportunity costs. Retention strategies require an investment of your time and resources. What if you invest in your talent, and they leave? Worse yet, what if you don’t invest in your talent, and they stay?

Retaining Talent Requires a Solid Succession Plan

Design and execute a succession plan, as part of your core retention strategies. It’s a relatively simple process that requires you to:

  • 1. Create a written succession plan and stick to it
  • 2. Determine the capabilities required in each executive or key position
  • 3. Compare the list of capabilities against the firm’s senior talent
  • 4. Conduct regular, in-depth reviews
  • 5. Assess candidates for promotion or development
  • 6. Implement and periodically review your succession plan
  • 7. Ensure your executive benefit programs align with your goals and industry peers

Your succession plan is the framework for improved communication between the board and senior management. The plan will better align leadership with overall strategic direction and provide the executive team with the opportunity to adjust their role to best meet changing business conditions.

Best Practices

While we cannot control current population and demographic trends, we can apply industry-leading best practices to our companies to address the talent gap.

Non-qualified deferred compensation (NQDC) plans are a cost-effective and best-practice strategy to implement to attract, retain, reward, and motivate key talent. In fact, approximately 91 percent of Fortune 1000 organizations have NQDC plans in place. NQDC plans offer a unique opportunity for executive participants to voluntarily defer (pre-tax) otherwise currently taxable compensation.

Additionally, dollars deferred grow tax-free until a future specified date─retirement, termination, scheduled distribution, death or disability─when payouts are then subject to the participant’s tax rate at that time. NQDC plans provide key talent with a significant savings opportunity to effectively plan for their financial future.

Next Steps

Don’t find yourself in the familiar situation where a rising senior executive suddenly walks out the door to accept a job at a competitor. Rather than chalking it up as the old “an offer he/ she couldn’t refuse,” employ new strategies that will keep your employees happily placed at your organization.

To Your Success,
Trevor Lattin, Managing Director
Phone: 949-514-8738
Cell: 949-306-5617