Despite a year-to-year decline in the number and value of one-time awards granted to executives, sign-on, make-whole and retention awards continue to represent a significant cost to companies and their shareholders. In this post, we use Glass Lewis data gathered in the 2023 and 2024 proxy seasons to explore the importance of proactive succession planning.

The aggregate value of all one-time awards for the S&P 500 decreased from $1,734,257,530 to $1,539,035,091, and the number of one-off awards was down 16% year-over-year. Of that smaller pool of one-time awards, the proportion that were granted as sign-on awards in relation to recruitment increased; however, the proportion of sign-on awards that were designated as “make-whole” (granted in lieu of forfeited compensation from a previous employer) decreased. This may help explain why the average value of sign-on awards also fell year-over-year (from $3,326,772 in 2023 to $2,541,968 in 2024), as make-whole awards generally account for the largest portion of awards granted to new hires.

One-Time Award Breakdown

It is also notable that the overall proportion of one-off awards that were subject to performance requirements increased to 18.5% (16.5% in 2023). This could be attributable to a decrease in the number of severance awards, which are not typically subject to performance conditions.

The Cost of CEO Transitions

Overall, S&P 500 companies that went through a CEO change in 2023 reported total CEO compensation averaging approximately $28.4 million for the year, compared to an average of $17.3 million at S&P 500 companies that did not. This sizable gap in overall CEO compensation costs underlines the importance and the stakes of managing CEO transitions.

Most CEO transitions involve some level of one-time award payments. Although investors are generally understanding of the market for talent, they will raise questions if those payments appear exorbitantly excessive. That’s all the more likely to occur when the company has not adequately prepared for the CEO succession, or when transitions go unexpectedly wrong.

Here are some noteworthy recent transitions:

  • Keurig Dr. Pepper (KDP): Former CEO Ozan Dokmecioglu resigned following a code of conduct violation in November 2022. Subsequently, KDP reached outside the company to hire former Mondelez executive Tim Cofer and paid him a make-whole sign-on bonus of $15 million to do so.
  • CH Robinson Worldwide Inc (CHRW): Following Bob Biesterfield’s resignation in 2023, the company hired David P. Bozeman as new CEO following a months-long search. Mr. Bozeman received $23 million in sign-on and make-whole awards — and other NEOs received retention award valued at $9.4 million, underlining that the cost of ensuring continuity of leadership in situations of unexpected volatility can extend beyond just the CEO.
  • Sealed Air Corp (SEE): Previously, in August 2022, former CEO Ted Doheny’s contract had been extended by the company through 2027 — yet he stepped down from the role in late 2023. In connection with the change, Mr. Doheny received severance valued at approximately $6 million, and his successor ultimately received sign-on awards worth $10 million.
  • Fair Isaac Corp (FICO): In this case, no CEO change took place – but shareholders paid a hefty sum to ensure that it would not. With CEO William Lansing reaching retirement age and no successor in place, the company made a retention payment to Mr. Lansing valued at approximately $31 million. The company saw significant opposition in the subsequent shareholder vote, but it still passed with approximately 58% support.

Given the situation that these companies found themselves in, their decisions may not have been wrong – ensuring that the right person is in place as CEO is of paramount importance. However, the sharp costs underline the increasing importance of succession planning. In each case, these companies ultimately paid out more than the total CEO compensation for their peers in transition awards, and in some cases well over the median pay for a peer CEO.

Takeaways

Strong succession planning allows companies to minimize transition costs, as well as the uncertainty and volatility associated with unexpected changes. Where elevated transition costs are deemed necessary, companies can help ensure shareholder support by providing robust disclosure of the rationale behind transition-related payments and a clear understanding of what CEO compensation will look like after the transition is complete.

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