CEOs hired as part of an organization’s internal succession plan tend to stay longer and perform better—for less initial compensation—than the average new CEO, according to research from the Krannert School of Management at Purdue University, published in March 2011.
The lesson from this research isn’t simply to choose internal successors to your top executives, it’s to prepare internal successors. This is the difference between an emergency plan—such as the proverbial sealed envelope in the board chairman’s desk—and a true succession plan.
In an effective succession plan, two main elements work together: executive development and incentives.
To accomplish this, start with four steps:
1. Move beyond once-per-year “succession” planning
A credit union board’s annual strategic planning session may include an hour or two to identify interim candidates for CEO, chief financial officer, etc., should a current executive leave suddenly.
The candidates may or may not be told about it. This is simply an emergency plan.
In a succession plan, candidates know they’re next in line. And they’re put on a development path that prepares them to take over in an emergency or in a planned succession.
2. Have human resources (HR) champion the succession plan
Your organizational chart should include a dotted line from the head of HR directly to the board regarding the succession plan. CEOs may not be invested in overseeing a robust succession plan.
An HR executive can help design development programs and follow up on their progress with the board.
3. Create hands-on development, not just outside classes
In the CUNA Human Resources/Training & Development Council white paper, “CEO Succession Planning and Transition,” author James Cardwell analyzes some failed credit union executive successions.
A common theme: potential successors are assigned executive training courses rather than hands-on training.
Cardwell recommends preparing successors through cross-functional training over two or three years, if possible, so candidates can learn other areas of the credit union thoroughly.
4. Set up supplemental executive retirement plans (SERP)
Part of creating a sustainable ethic of succession is building in a cost, beyond salary, for competitors to acquire your next-in-line executives. A properly structured SERP adds to a competitor’s cost while creating a deferred compensation incentive for executives to stay.
Executive salaries have increased commensurate with the size and complexity of credit unions over the years. The problem: Tax regulations limit credit unions’ contributions to pension and defined-contribution retirement plans.
These executives also face Social Security maximums and limitations on disability insurance and corporate-purchased life insurance.
As a result, highly paid executives can expect a much larger gap than other employees between their pre- and post-retirement income.
Consider two options for closing this gap:
* “Non-qualified” accounts, such as 457(f) and 457(b), funded and owned by the credit union. They generate interest and/or investment returns to be paid to the executive under agreed-upon circumstances, such as when the executive reaches retirement age—provided he or she stays with the credit union until then.
* A split-dollar life insurance program can be used with, or instead of, nonqualified plans. They offer a stable underlying instrument—a whole life insurance policy—that can be owned by the executive.
Work with an attorney and experienced providers for SERPs. And, as with your entire succession plan, review them regularly—so the next time your credit union must replace a top executive, the right person is already onboard.
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