Executive photo by bruce mars on Unsplash

Executive Retention Grants: A Way to Keep C-Suiters Around

In the United States, there has been a surge in CEO turnover at large, publicly-traded companies. Most notably, Jeff Bezos announced at the beginning of 2021 that he would be stepping down as Amazon CEO. He did say that he would stay on as Executive Chairman. Andy Jassy, the head of Amazon Web Services, will be replacing Bezos. Similarly, Disney CEO Bob Iger unexpectedly stepped down, and Disney named Bob Chapek as CEO in February 2021. Bob Iger remains involved in the company as Executive Chairman.

Following the departure of a CEO, it is critically important that companies retain other C-suite executives. While the CEO often gets the most praise or criticism for company performance, a strong core team behind the scenes is fundamental to a company’s future success.

In numerous situations, the departure of a CEO results in the departure of other senior executives. This can be a result of differences in leadership strategy or vision that make the new CEO’s style incompatible with the existing executive team’s operational effectiveness. C-suite departures can also be a consequence of a passover for consideration as the new CEO.

Executive succession planning has become an increasing area of focus. This is especially so in the context of retaining senior executives after a CEO leaves the company. CEO departures are hitting new records. The first nine months of 2019 set a record for CEO departures. Those months represented a 13% increase from the same period in 2018.

Executive Retention
Executive Retention
Image credit: Piqsels

The median tenure for CEOs has been on the decline. A 2018 study concluded that, at S&P 500 companies, the median CEO tenure is five years. In comparison, the median tenure in 2013 was six years. Looking even farther back historically, it is clear that CEO transitions have been becoming more frequent in recent years. The increasing frequency of CEO exits has cast a spotlight on effective succession planning.

One strategy that has been gaining prominence to limit post-succession turnover of other C-suite executives is to make special retention grants. Executive retention grants can come in the form of cash or equity awards. They are made in addition to the executive’s regular salary and standard long-term incentive package.

Joseph Adams, a partner specializing in executive compensation at the law firm McDermott Will & Emery, explains one reason that retention grants are appealing: “they have been around forever, and I don’t think they’re viewed as overly excessive, particularly since they’re not a flow of cash out the door. You usually have to stick around to get them.”

A study on retention grants to named executive officers (NEOs) at large companies from 2010 to 2016 demonstrated that these bonuses have a strong effect. Nearly 40% of the companies in the study with CEO turnover gave out special retention grants to other NEOs. Executives who received such grants were far more likely to stay with the company for two years following a CEO’s departure. As expected, the higher the executive retention grant, the more likely it was that the executive would stay at the company after the CEO’s departure. However, the study indicated that this amount leveled off above $2 million.

The study highlights an important fact — although these grants are effective, the impact is short-term. NEOs most commonly leave the company in the third year after the succession. Companies often structure these grants with a three-year vesting schedule, suggesting that C-suite executives are inclined to leave after receiving the entirety of their award.

Grants most commonly consistent of a three-year vesting schedule, although practices vary. On average, grants vested over 3.6 years. In 78% of cases, the company used a ratable vesting schedule. A ratable vesting schedule involves payments made available in gradual installments. On the other hand, under a cliff vesting schedule, the executive receives the full award only after a certain date. For companies that employed a cliff vesting schedule, the average total vesting period was 2.5 years.

In terms of grant size, the average award was $3.3 million. Companies often structured this amount to be a multiple of salary, typically one- to two-times annual salary. Interestingly, the study found little correlation between the size of the retention grant and the number of years of retention that resulted.

Retention grants are just one of many strategies that can have an influence on how long a NEO decides to stick around the company after a CEO leaves. A host of non-monetary factors play a role including age until retirement, personal ambition, feeling connected to the company’s mission, and fulfillment derived from the executive role.

As many companies plan for the future, they should continue to assess the effectiveness of retention grants. Leadership departures can have a ripple effect throughout the executive ranks of a company. Companies should continue to analyze various executive retention strategies in order to maintain their future stability and growth.

Ryan Carpenter serves as Attorney and Managing Director of Carpenter Wellington. Ryan advises clients across a broad set of corporate and commercial matters.