A New CEO Incentive: Find Your Own Replacement

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It’s not every day that a CEO—in addition to handling a long list of other tasks—is offered the following proposition: Help find your successor, and you’ll be rewarded handsomely.

And yet, some boards are turning to this tactic, offering incentives to CEOs that are contingent on them bringing in a successor. At a time when CEO tenure continues to shrink—7.2 years on average, down from 10.8 in 2015—and CEO departures remain at record highs, the cost of poor succession decisions couldn’t be clearer. According to data from MyLogIQ, 41 S&P 500 companies linked CEO-succession or related planning to short-term incentives, up from 22 companies in 2020. “More and more, boards expect CEOs to take active steps to build a pipeline of candidates,” says Stu Crandell, senior client partner in Korn Ferry’s Board and CEO Services practice.

The result: By establishing key performance indicators that incentivize CEOs to help with the succession process, boards are making a once informal and quiet process more visible and disciplined. Many of these rewards come in the form of short-term incentives, though experts are quick to note that—given the amount of company stock in leaders’ compensation packages—ensuring a successor performs well is in a CEO’s best interest long after they depart the firm.

To be sure, bringing the CEO more deeply into the succession process raises plenty of concerns. For one, if the CEO isn’t truly aligned with the timeline for finding their successor, boards can "inadvertently cede too much control of the transition,” says Chris Von Der Ahe, senior client partner in Korn Ferry’s Consumer Markets practice. It’s also possible that the CEO may create a horse race among internal candidates that “could result in negative conflict-of-interest related outcomes,” says Sarah Oliva, principal in Korn Ferry’s Board Effectiveness practice.

Still, the new incentives are aimed at reducing the tension between a CEOs’ responsibility for helping train potential successors and their lack of authority in picking one. “This sometimes results in the CEO not spending time developing successors,” says Oliva. “This is a creative way to manage particularly challenging CEO-succession situations."

A clear incentive can “make the CEO visibly invested in the process, improving onboarding and knowledge transfer,” says Von Der Ahe. It can also help focus the CEO on developing talent internally and building relationships with potential external candidates.

If boards are considering implementing this incentive, experts say best practices include keeping the CEO in an advisory role and tying their involvement to process milestones, such as candidate exposure and onboarding completion—not who gets the job—to ensure the board makes the final decision. At the end of the day, “hiring and firing the CEO is the most important responsibility of the board,” Oliva says. Adds Crandell: “No board should be outsourcing succession decisions to the CEO.”

Learn more about Korn Ferry’s Succession Planning capabilities.

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