Succession planning is very important for keeping businesses strong and even viable. The work done to ensure a successful succession can also immediately benefit the company while also making sure it will have a smooth leadership transition in the future.
Succession plans should involve the board of directors, the CEO and other key senior executives. The first step is to develop a business and succession plan and to gauge if the company has the personnel already in place to fulfill the plan’s objectives.
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If not, additional executives may have to be recruited. The succession plan thus helps to establish a framework for future hiring as well.
Without an effective retention strategy, the costs of recruiting and re-recruiting executives can be enormous. The business can also have major disruptions in both revenue production and adjusting to market conditions.
Financial incentives, or “golden handcuffs,” can be an integral part of succession planning and usually include the following.
Employment and change-in-control agreements outline rewards for remaining with the company. This provides assurance to the key employees and protects the company’s investment in management talent.
Short-term incentive plans, such as salary, bonus and related compensation align the company’s objectives with the near-term needs of these employees. Supplemental disability and life insurance provide protection. Equity-based plans help employees to participate in the long-term growth of the company through ownership and aligns them with the shareholders in the success of the business.
A central, very effective way to retain executives is through executive benefit agreements. These plans can be designed so they will only vest if the executive is with the company for a given period. They can also stipulate that certain financial goals, such as earnings, return on equity and/or stock price, must be met.
Mid- and long-term wealth accumulation programs can have vesting schedules to encourage retention, reward loyalty and meet the retirement income and other financial planning goals of the employees. Thus, they can foster near- and long-term financial performance.
The need and appeal of executive benefits also stems from the fact that there are very significant limits on what executives can contribute to and receive from qualified retirement plans (e.g., 401(k) plans). For example, the maximum annual contribution that an executive can make to a qualified 401(k) plan is $18,000. For an executive earning $250,000, this is just 7.2% of annual compensation, a modest amount especially if the executive wants to make larger contributions to “catch up” on retirement planning.
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Most qualified 401(k) plans allow the employee to defer 10-15% of salary. For an executive making $250,000, this would be a total deferral of $25,000-$37,500. Thus, a supplemental deferral program gives the executive the ability to defer the same percentage as someone that only uses the qualified 401(k) plans.
With many of these executives likely to live until 90, according to the Social Security Administration, there is an enormous gap in what they can save and acquire from conventional retirement vehicles and what they will need to maintain their lifestyle at retirement.
Non-qualified retirement plans
Non-qualified retirement plans can be used to bridge this gap, providing executives with a much higher percentage of pre-retirement pay. These take many forms and include non-qualified savings plans that supplement the 401(k) and can provide added deferred contribution opportunities. For some companies, it is also very cost effective and strategically wise to provide a matching contribution that will be vested after a period of years or upon retirement.
Supplemental executive retirement plans or SERPs are also widely used. Here, through vesting schedules set by the company, the amount the executive receives can be tailored to time of service and the degree to which company goals are met or exceeded.
One of the reasons non-qualified retirement plans are cost effective is that the company can select which executives, or class of executives, will be covered by the plan. Companies have a great deal of flexibility in this regard.
Once the benefits are in place, companies should make sure they effectively inform executives about the value of these benefits, and communicate about them regularly. When executives are reminded of the value of these plans, they are less likely to entertain competing offers.
By initiating succession plans and providing targeted compensation and executive benefit plans, companies are best able to retain their best talent. In doing so, they reduce operating costs and position the business to better succeed, in both the near-term and the future.
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