A new look at CEO retirement benefits.

• Author: Friske, Doug
• Position: Executive Compensation

In a post-reformist world, severance packages and other termination provisions are facing increased scrutiny. As boards evaluate how best to transition the CEO into retirement, here is some guidance on structuring the retirement package.

RETIREMENT USED TO BE a relatively benign event, even for a CEO. The transition was often to a trusted No. 2, who, like the CEO, had been with the company for many years. A continued seat on the board (maybe), a series of events to celebrate a career, a few relatively small tokens of appreciation (e.g., a gold watch, a set of golf clubs), and that was it. Then it was off to a life of travel, golf, and other pursuits.

Those days are gone, along with the seemingly eternal bull market and other events of the 1990s that brought profound change in the way CEOs are treated in retirement.

Among other things, the 1990s gave rise to the celebrity CEO who was viewed as singularly accountable for the success of the organization. Hiring a new CEO commonly meant contract negotiations similar to those for a free agent in sports, and retaining a prized CEO often required the same high-stakes discussions.

In cases of very strong performance, the CEO was celebrated and retirement was an event of major concern ("Who could ever replace Mr. CEO?"). However, when performance was less than stellar, companies increasingly looked for ways to gracefully make a change in management. In these cases, retirement was often a useful tool to ease out the incumbent. These two extremes of the spectrum became more common in the 1990s, and, as a result, the retirement of a CEO became anything but a routine event.

Greater inquisitiveness

In the wake of corporate scandals and revelations of undisclosed post-employment benefits, there is much more interest these days in what companies provide their former CEOs in retirement. With the new corporate governance standards and accounting oversight put in place under the Sarbanes-Oxley Act of 2002, CEO retirement packages are being questioned almost as a matter of routine.

In today's reformist environment, successfully managing the CEO retirement and succession process is one of the most important jobs of a board of directors, and how the retiring CEO's rewards are handled is a key part of this process.

In some cases, retirement provisions are defined by an employment agreement. The use of such agreements places pressure on boards to determine appropriate retirement provisions long before the actual event. How the contract and related retirement provisions are structured can also be influenced by the need for security on the part of the CEO (for example, in a hiring situation) or by real or perceived retention concerns.

Despite the focus on the appropriateness of executive pay, boards will continue to strive to make sure retiring CEOs:

-- manage an effective succession process;

-- are available to provide service to the company in an appropriate manner;

-- do not compete against the company;

-- provide an example for the new CEO to follow;

-- are appropriately rewarded.

Typical practice

Before the 1990s, typical CEO retirement benefits were usually confined to:

* Retirement provisions, usually in line with company policy but sometimes enhanced for the CEO.

* Provision of office facilities...