Do You Have A Real Succession Plan or Just an Emergency Plan?

by: John Moreno, Executive Benefits Specialist, CUNA Mutual Group

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.

This research’s lesson 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.

Link executive development with incentives
In a successful 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 may include an hour or two to identify interim candidates for CEO, CFO, 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 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 planning. 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 regularly with the board.

3.  Create hands-on development, not just outside classes
In the CUNA white paper2, “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 a period of two or three years if possible, so they can learn other areas of the credit union thoroughly.

4.  Set up supplemental executive retirement plans (SERPs)
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 supplemental executive retirement plan (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 is, 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, non-qualified 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 on board.

John Moreno is an executive benefits specialist for CUNA Mutual Group. Contact him at 800.356.2644, ext. 6921, or at john.moreno@cunamutual.com.

1 – Qianru Qi, “The Role of Board of Directors in CEO Succession: Theory and Evidence,” Purdue University, Krannert School of Management, March 15, 2011.
2 – James Cardwell, “CEO Succession Planning and Transition,” CUNA, Inc., April 2011.

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