How Executive Compensation Improves Succession Planning

How Executive Compensation Improves Succession Planning

Executive compensation packages and succession planning remain unlinked (and separately managed) in many of today’s organizations. Companies that bring the two together, however, are beginning to get some real attention, and there’s a good reason for that. It works.

Companies with more incentives tend to perform better overall, and linking those incentives to succession planning can bolster the succession planning process and help ensure its success. Formerly establishing this link also increases internal motivation, improves retention in high potentials, and contributes to an overall improvement in organizational culture. Even better, there are myriad ways to establish the connection, which means organizations can be flexible in approach, implementing what works best for their companies and their employees.

An organization might link a portion of departing CEOs and other C-suite employees’ annual bonuses to their proactive involvement in the development of their successors. This ensures their active participation in the development process, and assists in the smooth transfer of information to potential candidates. Financially rewarding top-level executives who give at least a one-year notice also assists succession planning efforts by encouraging executives to think long-term. Such thinking also provides the company with the kind of notice needed to find an ideal internal replacement (a process that can take up to three years). Creating incentives for internal candidates to close gaps in their experience and establishing retention packages to reward high potential employees not designated as successors can also be extremely effective. In fact, the latter may be essential to help reduce the type of pay stratification that can severely hinder succession planning efforts long-term.

Tying compensation to succession planning won’t fix a succession planning process that is underdeveloped or ineffectual, but it will add an extra layer of stability to an existing, effective process. Everyone – regardless of level – needs to feel motivated. A robust compensation package helps establish and maintain that motivation, while sufficiently linking it to the succession planning process directs it toward the activities the company most needs. Linking the two is a win-win.

To learn more about how executive compensation improves Succession Planning, request a Succession Planning Software Demo.

FAQ

Why should executive compensation be linked to succession planning?

Companies with more incentives tend to perform better overall, and linking those incentives specifically to succession planning strengthens the process by increasing internal motivation and improving retention among high potential employees. It directs existing motivation toward the succession activities the company actually needs.

How can compensation encourage outgoing executives to actively develop their successors?

One approach is tying a portion of a departing CEO or C-suite executive’s annual bonus to their proactive involvement in developing their successor. This helps ensure the outgoing executive stays engaged in the process and supports a smoother transfer of knowledge to the incoming candidate.

Why does financially rewarding a longer notice period from executives matter for succession planning?

Rewarding executives for giving at least a year’s notice encourages longer-term thinking and gives the company the lead time needed to find an ideal internal replacement, a process that can take up to three years. Without that notice, organizations are more likely to be caught scrambling for a successor.

How can retention packages for non-designated high potentials support succession planning?

Offering retention packages to high potential employees who weren’t named as official successors helps reduce pay stratification, which can otherwise undermine succession planning over the long term. It keeps talented employees engaged and retained even when they aren’t the immediate pick for a specific role.

Will linking compensation to succession planning fix a broken succession process?

No. Tying compensation to succession planning adds stability to an already effective process, but it won’t repair a succession planning process that’s underdeveloped or poorly designed to begin with. The compensation link works best as reinforcement, not as a substitute for a solid underlying process.