Want to pave the way for the organization’s next leader and light a fire under your current chief executive in the process? Rewarding your CEO for helping to find and groom a successor may be one way to go.
A recent Wall Street Journal article calls this practice the “hottest corporate fad,” citing firms including Avnet Inc., Intel Corp. and Marriott International Inc. as examples of large companies offering incentives to chief executives for their efforts in ensuring a smooth transition when they eventually turn over the organization’s reins.
Motivated at least in part by “investors’ anxiety over rocky corner office transitions,” these and other companies have taken to linking CEO performance awards to succession planning, with 16 Fortune 1000 firms disclosing such links in their latest regulatory filings, the article notes.
At the Santa Clara, Calif.-based Intel, for instance, now-former CEO Paul Otellini has received $4 million in stock and cash since January 2013 for his part in bringing along Brian Krzanich, who took over Otellini’s old post in May of last year, according to the Journal. Otellini, who has already gotten $1 million in cash, can sell half of his $3 million worth of shares this May.
Other organizations are taking a slightly different tack. Phoenix-headquartered electronic component distributor Avnet is basing chief executive Richard Hamada’s next annual raise partly on his succession planning prowess. Promoted to CEO in July 2011, the 56-year-old Hamada told the Journal he “hopes to run Avnet for a total of eight to 10 years,” but noted that he now gives detailed succession updates at every board meeting.
Board members at Marriott International believe that “continuity of management is critical,” David Rodriguez, the Bethesda, Md.-based hotel chain’s CHRO, told WSJ. As such, CEO Arne Sorenson’s ability to secure the board’s approval of his CEO transition agenda factored into the amount of his bonus in 2012, according to Rodriguez. He estimated that roughly 10 percent of the nearly $1.95 million bonus bestowed upon Sorenson reflected such individual achievements.
The Journal article may describe the practice as a fad, but, as directors become more involved in grooming future leaders, this type of reward system “will be commonplace in a decade,” Dennis Carey, vice chairman at Los Angeles-based Korn/Ferry International, told the paper.
In fact, the number of companies taking this approach is poised to triple in the next five years, according to Patrick McGurn, special counsel for proxy advisory firm Institutional Shareholder Services Inc.
Time will tell if that prediction is on the money, but McGurn makes a compelling—not to mention concise—argument for tying a CEO’s pay to his or her role in succession planning efforts.
“Nothing tends to focus CEOs’ attention,” he told the Journal, “like … good, swift kicks to their incentives.”