Remuneration Planning for Management Succession

On 18 November, MM&K hosted the latest in its series of Remuneration Dinners. The guests on the evening included Company Chairs, Remuneration Committee Chairs / Members and CEOs. The discussion topic for this event was Remuneration Planning for Management Succession.

The topic was introduced by MM&K’s CEO Paul Norris who contended that Management Succession was an important matter, not always given the priority it deserves.

The following are excerpts from his opening address:

“It may be a universally accepted principle that succession planning is important but it does not seem to have been universally embraced. One listed company, when asked about succession planning replied: “We are a small head office team and don’t have the time to be thinking about that.”

Many family-owned companies are reluctant to do any succession planning at all. For those companies, the closer relationship between shareholding and management and the potential conflicts between the interests of the family and the interests of the business are complicating factors. The key decision of whether to select the next CEO from inside or outside the family may be influenced as much by family needs or preferences, as it is by business requirements. Objectivity can lose-out to emotion.

Another reason for hesitation might be that deciding to embark on a succession planning is like deciding to buy life assurance. It’s a sensible thing to do but having to grapple with the inevitable is something we would rather not be reminded about and, in any case, it’s way off into the future, isn’t it? But the future is uncertain, which simply strengthens the case for planning.

There are good reasons to plan

• Avoiding unwanted disruption: Because management change can affect many aspects of a business:

– culture and values
– risk management
– business continuity
– strategy and growth
– diversity
– board effectiveness,

the absence of planning create potential for unwanted disruption.

• Knowledge transfer: The Baby-Boomers are approaching (or have reached) retirement. Remuneration policy can play a major part in how to motivate those workers to stay and educate their younger colleagues in Generations X and Y, some of whom will be tomorrow’s top management?

Older employees are not necessarily less motivated than their younger colleagues but they are likely to have different priorities and need to be motivated differently. Where it is important to retain them to pass on their knowledge and experience, flexibility around working times and pay policy can help.

• Maintaining a strong governance framework is important for all companies: The UK Corporate Governance Code requires Nominations Committees of quoted companies to maintain an effective succession plan, based on merit and objective criteria and which promotes diversity, cognitive and personal skills.

Remuneration committees are responsible for ensuring remuneration policy promotes long-term growth in shareholder value in accordance with strategy and the company’s succession and risk policies.

Governance principles set down the requirement but leave it to companies to determine the policy which works best for them. So, there is plenty of scope. Nomination and remuneration committees should combine to:

– identify the core competencies required to be a member of the board/leadership team; and

– develop a pay policy to assess and reward performance against those core competencies.

Remuneration policy can help employees see their relationship with the company in a long-term perspective and thereby retain the talent for the future.”

Having established the benefits of considering succession planning, Paul went onto address the potential dangers and made the observation that a failure to plan involves risk.

“A failure to grapple with the issue of succession might give rise to stakeholder concerns about stability, competitiveness and growth because how well it is managed represents a key measure of board effectiveness.

The company also risks the prospect of having to take unplanned, reactive action, which might result in unwanted cultural and value changes on the arrival of a new CEO and delay in finding a new CEO may be disruptive and have an adverse effect on performance, morale and confidence.

Following on from this thoughtful introduction, a wide range of practical issues were addressed in discussion over dinner. Whilst the Chatham House Rule applies, a note of the topics aired will be circulated and will provide the basis for an article in the December edition of our Newsletter. In the meantime, the following are some of the key aspects arising from the evening:

Drawing the strings together

• Succession planning is part of risk management; it is a vital task for boards to address; how well it is managed represents a key measure of board effectiveness
• Identifying, developing and assessing the competencies required for leadership are essential
• Knowledge transfer from more experienced employees plays a key role in succession planning
• Remuneration policy has a major role to play in the development, assessment, retention and recognition processes
• Nomination and remuneration committees should combine to develop and retain the next generation of leaders.

For more information about remuneration planning and management succession please contact Stuart James or Paul Norris.

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