Executive Briefing

Succession plans need attention; companies outsource for varied reasons; few companies use executive severance policies.

Sep 1, 2004
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2004 Sept HR Magazine

Succession Planning Lags

More than one-third (39 percent) of senior executives polled in a recent survey admitted they have no succession management plan in place for senior leadership positions. This is true in spite of the fact that 88 percent of CEOs think executive talent management issues are important to their boards, and 93 percent consider succession planning moderately to highly important to the organization’s success.

Virtually all board chairmen polled—96 percent—said succession management is key to the organization’s success.

Why, then, are some companies dropping the ball when it comes to succession planning? Forty-five percent of responding organizations said their ability to identify and develop leadership talent is limited by a lack of a clear approach to succession management, and 41 percent blamed a lack of available talent.

Another stumbling block may be a difference of opinion about the role of HR. “There is not as much HR involvement as you might imagine,” says Matt Paese, vice president for succession management at Development Dimensions International (DDI). While 44 percent of the 1,200 senior leaders surveyed by DDI and Chief Executive magazine believe HR should play a more active role, 47 percent disagree. The majority of responding organizations (59 percent) reported that HR executives play “no role” or “add little value” in the design of their succession practices.

Yet when succession practices were designed with HR’s help, they were rated by senior leaders as being more effective than those designed without the input of HR.

Why don’t senior leaders believe, then, that HR should play a greater role? Time and resource constraints and a lack of understanding of executive challenges were cited by some survey respondents, but the largest barrier to HR playing a more active role is a perceived lack of sufficient knowledge. “HR is valued when it demonstrates understanding of the business,” says Paese, and is seen as a partner in the succession-planning process.

“This is a unique window in time for HR,” says Paese. “Senior leaders are feeling critical pain. HR’s job is to think about how to identify the talent in the organization and create a clear, simple plan to develop it.”

(For information on how to improve succession planning within the HR function, see “Filling the HR Pipeline”.)

Best and Worst Companies To Recruit From

A global executive search firm, Morgan Howard Worldwide, has compiled lists of the 10 Fortune 100 companies that are easiest to recruit from and the 10 Fortune 100 companies that are hardest to recruit from.

“We work with many of the Fortune 100 companies,” says Marc Lewis, president of North America for Morgan Howard, based in Stamford, Conn., “and the lists are based on interviews with these companies and their clients.”

Companies whose executives were found to be most susceptible to outside job offers are Fannie Mae, American International Group, Merck, Verizon Communications, Hewlett-Packard, Citigroup, Boeing, Ford Motor Co., AT&T and Motorola. Companies whose executives are least likely to be enticed away are Wal-Mart, Dell, General Electric, Home Depot, Intel, McKesson, Cisco Systems, ConocoPhillips, Exxon Mobil and Kroger.

While cash, bonuses and other standard compensation components are important, other factors also determine whether a company is vulnerable to losing its top talent, says Lewis—including the following:

  • Sophisticated equity compensation.
  • CEOs who can connect with company leaders and communicate their vision.
  • An organizational structure that recognizes and rewards top performers.
  • Clear career tracks for executive-level positions.
  • Leaders who are given the autonomy to develop their ideas.
  • An overall healthy workplace culture.
Companies most at risk of losing their top executives, Morgan Howard found, were weak in at least two and often three or more of these factors.

Cost Not the Main Reason To Outsource HR

Although many employers turn to outsourcing to cut costs, HR executives polled in an annual survey named access to greater expertise (69 percent) and improvement in service quality (44 percent) as the two most important reasons to outsource HR functions.

“Too much emphasis on the cost of administering programs can be shortsighted,” says Joshua Joseph, director of research at the Bureau of National Affairs Inc. (BNA) and managing editor of BNA Surveys and Reports. “Thoughtful employers recognize that money saved by outsourcing at the HR department level means little if service problems end up costing them more elsewhere,” he notes. The 2004 survey of more than 900 HR executives was conducted by BNA and the Society for Human Resource Management.

Researchers found that employers motivated mainly by cost savings may be more disappointed with outsourcing results than are those with other motives. Among employers that outsource flexible spending account administration, for example, 59 percent of those driven by cost savings are disappointed with the results, compared with 36 percent of those that cite service quality and expertise.

And measuring a company’s net cost savings can be difficult. Forty-four percent of employers surveyed said their savings were “undetermined.” One reason for this finding, notes the report, is the fact that some activities—employee assistance counseling, for example—have never been handled in-house by most employers, who therefore have no base line to compare costs. Even for companies that do have comparative data available, researchers found, lack of resources and evaluation expertise can prevent them from developing meaningful metrics.

Cautious Optimism About the Economy

CEOs at fast-growing companies are optimistic about their economic future. Nevertheless, most are proceeding with caution, according to a recent PricewaterhouseCoopers survey of CEOs at 392 privately held product and service companies identified in the media as the fastest-growing U.S. businesses over the last five years.

Three-quarters of CEOs at these companies, which range in size from about $5 million to $150 million in revenues, expect the current economic upturn to last for at least two to three years; however, 67 percent are using a planning cycle of a year or less.

Despite the cautious short-term approach, 89 percent say their company’s ability to meet its business objectives over the next year or two is “excellent” or “good,” and most CEOs expect to take on major new risks such as hiring more full-time employees and increasing investments in training.

Going forward, 83 percent of CEOs are concerned about at least one major business or strategic risk. For 43 percent, the greatest concern is an economic downturn. Other concerns: keeping and attracting key employees (37 percent) and maintaining the quality of customer service (28 percent).

Executive ‘Prenuptial’ Agreements Reduce Risk for Employers

One in four companies have no executive severance policies, according to a recent study by Hay Group, a global organizational and human resource consulting firm based in Philadelphia. And only half the companies that do offer executive severance formally spell out the conditions, events and terms for payment.

In fact, almost one-third of the 223 CEOs polled have no employment contracts. Formal contracts are even less common below the CEO level; roughly half of executive vice presidents/senior vice presidents and about 65 percent of vice presidents work without contracts.

The new study recommends that companies define the terms and components of severance before new executives come on board and review them at each contract renewal. “In order to protect companies in these litigious times, contractual agreements should be in place before these executives start,” says Bill Gerek, global director of regulatory expertise in Hay Group’s executive compensation practice. “The timing should be similar to a prenuptial agreement, where the parties agree to the details when everyone is still happy.”

A well-designed executive severance policy, the study says, defines triggering events that entitle an executive to payment—a voluntary “good reason” resignation by an executive or an involuntary termination by the company other than “for cause.” Researchers found that companies were most exposed to costly, long-term payouts when they had narrow definitions of “for cause” terminations.

“To avoid lengthy and expensive payouts for poor performance or misconduct, compensation committees need to carefully review whether the definition of cause is sufficiently broad,” says Doug Jensen, head of Hay Group’s U.S. executive compensation practice. “It should include real performance criteria to judge the executive’s success.” Compensation committees, says Jensen, should “have numbers calculated so they can truly understand what the executive actually will be paid under various scenarios.”

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