Crafting a pay package for an interim CEO.

• Author: Friske, Doug
• Position: CEO Succession

Before the interim CEO can take on the role, the board faces an immediate challenge: How will he or she be compensated? There are several factors that boards should consider when determining the appropriate pay plan.

SUCCESSION PLANNING, a key function of the board of directors, is especially critical for the chief executive officer position. Years of planning often go into deciding on the best candidate for the most important leadership position in the organization. However, all of this planning can get swept aside when a sudden turn of events calls for an immediate change in leadership.

Rapid leadership changes have become more common, owing to heightened pressure on short-term operating results, increased focus on CEO performance as a litmus test for overall corporate performance, and revelations of accounting irregularities or other examples of inappropriate behavior. A CEO's death or severe illness may also necessitate a change.

In some instances, an organization's succession plan is well positioned to handle such unexpected changes in circumstances. The chosen successor is elevated to the CEO role, and the transition process begins. However, in other cases the chosen successor may require more time and experience before he or she is ready to take on the CEO role. Or, as has been the case with several recent accounting scandals, the events leading to the CEO's departure may also claim other members of the senior management group, including the company's top successor candidates. Finally, some companies find their succession plans are not where they should be, relative to developing CEO candidates, and thus no viable successor can be identified.

In these circumstances, companies often turn to an interim CEO to lead the organization until a permanent leader can be found. Interim CEOs are often chosen from the board of directors, or they may be former senior officers of the organization. Depending on the circumstances, interim CEOs can also come from outside the organization.

Before the interim CEO can take on the role, the board faces an immediate challenge: How will he or she be compensated?

Typical practice

In many cases, the compensation design and overall value delivered is based, at least in part, on that of the former CEO. The table on page 49 provides several examples of interim CEO compensation packages. Typical provisions, as illustrated in the table, include:

-- A cash-based pay component, expressed either as an annual or a monthly amount of pay;

-- A stock-based pay component, typically stock options.

The cash portion of the package is usually dominated by a fixed-pay element, with the use of monthly or annual denominations depending on the likely tenure of the interim CEO. Conspicuous by its absence is short-term incentive plan participation. Only four of the 10 examples cited include bonus plan participation.

Factors to consider

On the surface, determining interim CEO compensation should be a relatively straightforward exercise: Just review what the previous CEO was paid and adjust the package accordingly. But interim CEOs usually join the company at a point of great uncertainty, and while many aspects of the interim CEO's tenure may not be fully determined at the point he or she accepts the role, there are several factors that boards should consider when determining...