Pay for Succession?

David Ransburg
David Ransburg

When most family businesses hear the phrase, “you will pay for succession,” they likely think it means that there will be pain associated with the process of transitioning from one generation to the next. I’m here to suggest another, more positive way to think about that phrase… and this new way of thinking comes from some of the world’s largest publicly traded companies.

A recent article in the Wall Street Journal identified a growing trend where publicly traded companies have begun providing outgoing CEOs with compensation that is directly tied to grooming their successors.

For example, outgoing Intel CEO Paul Otellini had the opportunity to earn up to $4 million in extra pay if he successfully met certain criteria associated with preparing his successor, Brian Krzanich. While the company’s Board of Directors determined that Mr. Otellini had met some of that criteria, his performance was not sufficient to earn the full bonus – he received half.

This new approach is, I believe, especially interesting for family businesses because succession is one of the biggest challenges – if not THE biggest challenge – facing many family firms. Succession – or as we at FBCG like to call it, “generational transition” – is an extremely complicated issue that is influenced by many factors (e.g., Is the next generation prepared to take over the family business? Is the business viable?), but one of the common roadblocks to successful transition is often the incumbent’s reluctance to let go. That reluctance alone can be a very challenging knot to loosen, but the publicly traded companies mentioned above have given us another tool with which we can tackle that reluctance “roadblock”: pay.

While extra pay alone is unlikely to be sufficient to get most incumbents to let go, it can certainly be a powerful incentive to increase the likelihood that they will do so. From now on, perhaps, the idea of “paying for succession” will take on a new, more positive meaning.

Have you ever paid an incumbent for grooming their successor? If so, how well did it work? And, can you think of other forms of “pay” that might be even more effective than money?

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