A few months back I had written on Runaway CEO compensation after the Bob Nardelli/Home Depot fiasco. My sole recommendation on the way out of the CEO compensation mess was – better succession planning.
Well the results are in from last year. Wall Street Journal cites a study (article behind pay wall) and says:
In 2005, 40% of the CEOs hired by companies in the Standard & Poor’s 500-stock index were outsiders, according to executive-recruiting firm Spencer Stuart. Last year, that figure fell to 15%. In the first quarter of this year, there were eight CEO transitions among the S&P 500; only one went to an outsider.
The shift is partly a reaction to some dramatic flameouts — think Carly Fiorina at Hewlett-Packard and Robert Nardelli at Home Depot. But it is also true that directors — jolted from their slumber by corporate scandals, Sarbanes-Oxley and activist investors — are working more diligently than before.
Finally, boards and CEOs are taking seriously, one of their most important jobs – succession planning. Fear is a great motivator.
An excerpt from my post:
The only good long-term answer to the mess on CEO compensation is good succession planning. Shareholder (and media) ire should be turned on the board, not when the CEO is fired and leaves with a king’s ransom, but when the board and outgoing CEO fail to promote from within and go outside to sign a CEO with an “all-upside” employment contract. If the board does not want to get stuck in a situation where they have to get in a superstar CEO from the outside, they must insist on good succession planning. An insider CEO will not need a king’s ransom to convince him to take the position (though you might have to pay him market to keep him). Plus, he will probably be more successful at what he does. It is no wonder that the GE CEO and top executives have, for the most part, no employment contracts. They serve at the will of the board. GE reaps the benefits of great succession planning.