The Golden Parachute Gets Softer: How Companies Are Rewarding Would-Be CEOs
The traditional image of a CEO succession battle often conjures images of fierce competition and, for the loser, a swift exit. However, a growing trend reveals a more nuanced reality: companies are increasingly offering substantial retention packages to executives who don’t get the top job. This isn’t just about consolation prizes; it’s a strategic move to prevent talent drain and maintain stability.
The Rise of Retention Grants
Recent high-profile examples illustrate the scale of these awards. When Disney appointed Josh D’Amaro as its next CEO, Dana Walden, a key contender, received a one-time $5.26 million stock grant, alongside an annual target compensation of approximately $27 million. Similarly, at Morgan Stanley in 2023, the runners-up to Ted Pick each received bonuses valued at $20 million. These aren’t isolated incidents, but rather part of a years-long trend.
Why Pay to Retain Potential Departures at Bay?
The rationale is simple: executives who reach the CEO contender level possess invaluable institutional knowledge, established relationships, and a proven track record. Losing such a leader can disrupt operations, damage morale, and negatively impact the bottom line. The cost of replacing a top executive often far exceeds the price of a retention bonus.
The Limits of Loyalty: How Long Do These Grants Function?
Although these grants can be effective, their impact isn’t indefinite. A report from consultancy FW Cook found that retention grants typically have a “strong, but limited” effect, lasting around two to three years. This timeframe often aligns with the vesting schedules of the awards. Once a significant portion of the grant vests, an executive who was already considering a move may be more inclined to pursue other opportunities.
Interestingly, the size of the package doesn’t always correlate with longer tenure. The largest awards sometimes observe executives departing even sooner, suggesting that money alone isn’t enough to overcome disappointment or a desire for a fresh challenge.
External CEOs and the Exodus Risk
Companies appear particularly concerned about retaining talent when they hire CEOs from outside the organization. They are more than twice as likely to offer retention grants in these situations, recognizing the increased risk of an executive exodus when an outsider takes the helm. This suggests a perceived need to reassure internal candidates and maintain continuity during a period of change.
What Happens When They Leave Anyway?
Executives who leave before their retention grants fully vest typically forfeit the unvested portion. However, rival companies are often willing to compensate them for this loss, effectively covering the cost of the forfeited award as part of a recruitment package.
Beyond the Bonus: Alternative Retention Strategies
Financial incentives aren’t the only way to keep flight-risk executives on board. Companies are too exploring alternative strategies, such as offering novel opportunities, expanding responsibilities, or providing international assignments. Disney, for example, promoted Dana Walden to president and chief creative officer, a newly created role, in addition to her financial retention package.
Giving a runner-up “a new challenge” can be a powerful motivator, but as one consultant noted, “it very often comes down to dollars and cents.”
The ‘Goldilocks Zone’ for Retention Packages
FW Cook’s research suggests a sweet spot for retention awards. Packages between approximately $1.6 million and $5 million, with a median around $3 million, correlate with the longest average tenure – just over four years post-succession. Smaller awards buy around three and a half years of loyalty, while the largest packages surprisingly result in departures in just over two and a half years.
FAQ
Q: Are retention grants becoming more common?
A: Yes, they are part of a growing trend as companies recognize the value of retaining top talent even when they don’t get the CEO role.
Q: How long do these grants typically last?
A: Typically two to three years, often tied to the vesting schedule of the award.
Q: What happens if an executive leaves before the grant is fully vested?
A: They typically forfeit the unvested portion, but may be compensated for it by a new employer.
Q: Is money the only factor in retaining executives?
A: No, offering new opportunities and challenges can also be effective.
Did you know? Executives who receive no retention award are the most likely to leave within the first year of a CEO succession.
Pro Tip: Companies should carefully consider the vesting schedule of retention grants to maximize their effectiveness.
Want to learn more about executive compensation and succession planning? Explore our other articles on leadership and talent management.
