December 13, 2022 Executive Compensation ESG & Human Capital Management Articles

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Eight CEO Succession Planning Questions Boards Should Ask

Directors need to understand their role in process oversight, emergency planning, transition dynamics and more.

CEO succession planning has become increasingly critical given the current volatility within the talent market. It helps businesses and boards prepare for potential and imminent transitions, ensuring continuous and effective company leadership, particularly during challenging times. However, navigating the process can be complicated. Here are eight questions boards should consider throughout the succession planning process.

1. Who oversees the succession planning process? 

Clearly defined roles within the planning process ensure smooth and effective transitions. Often, the full board assumes responsibility for succession planning. Some boards designate specific committees (usually compensation or nominating and governance) to oversee the topic. Another approach is for the board to divide responsibilities. For example, if the full board handles CEO or C-suite succession, next-level talent planning and succession may occur at the committee level to ensure the board considers longer-term successors. If the responsibility is assigned to a committee, the committee usually dives deeply into the topic and brings the key issues and discussions to the full board. Furthermore, if a board is searching for outside talent, a specially designated search committee (as a subcommittee of the board) may be helpful given the increased time and responsibility necessary for a search. 

Overall, strong discussion of the responsibilities is essential, with processes such as decision rights and frequency of succession planning reviews outlined in committee charters and/or proxy statements.

2. Has the CEO role profile been defined?

A role profile is generally used to define attributes and key skills needed for success at a company. The profile may reflect the future needs of the organization rather than the current incumbent’s profile and competencies. As such, it is important to review and update the profile to evolve with business strategy (perhaps every 12 months) and identify future skills needed based on the company’s strategic direction. It is important to communicate with management to understand which skills are key to the organization’s goals.

3. How large is the candidate pool?

Many boards identify a pool of about three to five candidates to ensure flexibility in succession planning. As the transition becomes more imminent, the pool can include a balance of external and internal candidates with diverse backgrounds. However, the candidate pool customarily includes multiple internal candidates, while external candidates would be included on a case-by-case basis. After the board identifies internal candidates, they can monitor candidates’ readiness and outcomes on an ongoing basis and ensure they receive the right coaching and developmental assignments.
Internal candidates require the extra step of identifying potential additional talent planning needs that may result from the candidate’s role becoming vacant after promotion. For example, if the current CFO is considered a candidate for CEO, the board may also identify potential CFOs as a replacement. Along with identifying potential candidates for roles, maintaining a talent pool requires identifying sourcing needs for other upcoming transitions and monitoring the retention and development of key players through transitions. 

4. How do candidates stack up against the role profile?

Assessments help identify candidates’ readiness and development areas. Following an assessment, internal candidates can be further developed through professional coaching, increased responsibilities and mentoring. Companies frequently choose to have CEO candidates assessed by a third party, which adds another viewpoint grounded in experience in succession planning for different roles. While the organization cannot actively participate in external candidates’ development, it can track potential candidates’ progression and see if other possibilities arise over time. Evaluations may measure not only the skills and experience required for the roles, but also the traits and emotional intelligence needed for success.

5. What will be the role of the board in helping to develop candidates?

The board should become familiar with high-potential candidates, which can occur formally (through meetings and presentations) and informally (through social events or outings). Internal candidates have the advantage of more opportunities to engage in the boardroom. Sometimes, board members might be asked to coach candidates. 

6. What are the important considerations regarding compensation throughout the succession planning process?

For internal candidates, pay decisions require consideration throughout the process, especially over the following three areas: 

  • Pay progression. Pay can be intentionally elevated for the identified CEO candidates over the succession timeline to signal progress and to lessen the gap between the final candidate and future CEO pay opportunity.
  • Pay actions for other leaders. Pay actions may be considered for other high-potential leaders (such as SVPs and VPs) impacted by the selection of CEO candidates. When there has been a selection following a CEO search, leaders affected by the transition might include those who feel displaced because they were not selected as the successor, are loyal or connected to planned executive transitions, are considered highly poachable because of their visibility and role regardless of succession context, or lead critical functions. It is also important to caution against retention that creates unintended consequences of binding leaders who will not fit under the new executive.
  • Equity. Previous equity awards and vesting schedules are also factors for consideration. In most situations, a solid progression and strong annual grants will help provide retention for potential successors.

For external candidates, the board may identify a pay positioning strategy. For example, if the company’s target positioning is at median, it may be helpful to bring in an executive below the market median, where possible, with the intention that they will be brought up to market two to three years after they are fully in the role. Candidates who have previously demonstrated proficiency in the role may receive starting compensation above the median.

7. Are we prepared for an unplanned departure?

While long-term preparation is key for succession planning, the board can assess whether it is ready to address any sudden unplanned departures. It is a best practice to develop an emergency succession plan that identifies an interim candidate (such as the CFO, the COO or relevant board members) who can step in quickly and ensure candidates have spent time with the board and current CEO to smooth the transition. The interim process identifies the most critical skills and responsibilities to cover an unplanned departure when a regular succession candidate is not ready. In addition, it may be helpful to identify individuals who can complement the emergency successor’s skill set to support them throughout the shift. 

8. Are we ensuring a successful transition?

Succession planning does not end upon the hiring of a new executive. According to Harvard Business Review and Corporate Executive Board, 50% to 60% of executives fail within 18 months of entering a new role. It is critical to share the evaluation criteria and available development assistance with the chosen individual early in the process to ensure a successful transition. It may also be helpful to enact short- and long-term transition activities to integrate the executive into their new role, including culture onboarding, executive coaches, clear goal-setting and frequent effectiveness evaluations. In addition, during this transition, it is essential to reaffirm or revise the overall business and talent strategy in alignment with the views of the board and the new CEO and set goals and incentives consistent with the strategy. Frequent and transparent communication between the board and the new CEO is critical to a successful transition. 

View the full article as it was originally published.

Blair Jones

Deborah Beckmann

Sara Bourdouane

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