United States: 6 Steps To Solid CEO Succession Planning

The lack of a proper CEO succession plan can be costly: Stock prices drop and shareholder value diminishes. The cost can even include a loss of market share, falling profits and organizational strife. To avoid such a scenario, a current CEO must identify and develop a successor. The board is responsible for establishing and monitoring this task as part of a CEO's performance criteria.

Solid succession planning can dramatically increase the likelihood of a successful leadership transition, yet it isn't always easy for companies to get started. Here are six steps that can help jumpstart the process:

  1. Understand the role — Clearly identify CEO responsibilities and expectations for how the work will be performed. This exercise should include expected attitudes and values, as well as specific behaviors that are desired, according to William J. Rothwell in his book Effective Succession Planning: Ensuring Leadership Continuity and Building Talent from Within.  Make sure that expectations are driven by the board, or some subset of the board, and consider the viewpoints of the eventual departing CEO.
  2. Create a roadmap — Identify the competencies, skills, education, leadership and work experiences that prepare a successor for the CEO role. These may include specific leadership roles in the organization (including expat assignments for global companies), board service, customer relationship management, and finance and operational experience.
  3. Gather data — Assess the strengths and developmental needs of internal candidates and compare them to what a CEO needs. Use validated assessment tools, 360-degree feedback instruments, personal observation, performance results and other methods that provide objective information.
  4. Interview and decide — See that the board, or the party tasked by the board, conducts a robust interview process for internal and external candidates. The interview process typically follows a three-step process: an initial round of interviews, final interviews with the top two or three candidates and one final interview with the individual to be selected.
  5. Communicate — Once a decision is made, explain to senior leadership why the succession plan exists, how it will be implemented and what the impact of roles and responsibilities will be to the leadership team. Typically, the communication comes from both the board and the departing CEO.  Subsequently, communications should be sent to the organization, typically via a town hall meeting, electronic communications and individual department meetings. Make sure that communications focus on answering three questions:
    • Why succession? 
    • What will be the impact on the organization's culture, roles and responsibilities, and mission?
    • What are the general milestones that will indicate orderly succession planning?
  6. Regardless of how the succession plan process concludes and how well the organization communicates, the leadership team and the employee base will logically have questions and insecurities about the direction of the organization and their role. So, addressing pay plans is essential.  Review the pay plans for the senior leadership team and key performers, and ensure the pay plans continue to do the following:
    • Provide competitive pay, particularly for any roles and responsibilities that changed as a result of the succession plan.
      Ensure optimal use of pay-for-performance plans.
    • Make sure any short- or long-term incentive plan reflects the appropriate metrics of the organization, which will bring the focus back to the task at hand.
    • Enhance the retention value of the pay plan.  The board should recognize that there will be key employees who need to be retained at least until the next successor is appointed or through the succession period. Employment contracts with severance protections, vesting-based equity or phantom equity plans, or simply cliff-vested deferred compensation plans can ensure orderly retention through the succession period.

The succession planning process requires a commitment from the CEO and the board, as well as other members of the senior leadership team. It's important to clearly articulate the individual roles and responsibilities of all senior leadership in this process and develop an ongoing method to evaluate progress. A robust succession planning process requires communication, commitment and courage, but the payoff can be great.

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