Whether anticipated or not, a CEO departure carries significant potential for internal disruptions and volatility. The board may consider it vital to retain the company's most experienced executives and, potentially, initiate a shift in corporate strategy.
Up to the start of COVID-19 in the US,
CEO turnover had increased in 2018, 2019, and going into 2020. It then paused during the crisis, but has
recently picked back up (most notably, Jeff Bezos announced he would step down as CEO but is staying on as Executive Chairman).
Frequently, the board turns to retention grants to add stickiness to top executives after a CEO departure. A recent
FW Cook study on the efficacy of retention grants for retaining senior executives found that the ability of post-succession grants to keep talent is strong, but time-limited. The authors researched CEO departures from 2010 – 2016 in conjunction with NEO grants and departures and found:
- Almost 40% of companies made retention grants to NEOs after a succession but only 20% of NEOs in the full population received such grants.
- Among those who received retention grants, the most common departure point was in the third year (in line with a three-year vest).
- Among those who did not receive a grant, the most common departure point was within the first year.
- The higher the grant, the more the staying power - but only up to $2 million, where the additional time leveled off. Average grant size was $3.3 million, with a three or four year vest.
The data indicates that time period immediately following a CEO departure is the riskiest in terms of additional executive departures. Retention grants are effective at retaining leadership talent, but not permanently – not even for the full length of the vesting period – so companies are typically only buying time. Capitalizing on the added time afforded by a retention grant is critical to developing or recruiting future leaders and to promoting organizational stability.
