Firms Use Bonuses for CEO Runners-Up

- These retention awards are a widespread practice, with around 40% of large U.S. companies using them during CEO transitions to ensure stability. Such bonuses are particularly common during mergers, acquisitions, and periods of significant corporate restructuring. - The effectiveness of these bonuses is often short-lived; while they can cut executive turnover by nearly half in the first year after a CEO change, their impact diminishes significantly after the second year. Many executives who receive these grants still depart, with a noticeable spike in exits after the third year, which often aligns with the vesting schedule of their bonus. - One study found that 25% of executives who received a retention award after a CEO transition left the company within an average of 1.2 years. This suggests that while the bonuses can provide a short-term solution to prevent an immediate exodus of talent, they are not a guarantee of long-term loyalty. - Shareholder advisory firms like Glass Lewis and Institutional Shareholder Services (ISS) have raised concerns about large retention awards that are not tied to performance metrics. For example, Goldman Sachs faced pushback for awarding its CEO and COO $80 million in time-based restricted stock units without new performance conditions attached. - These "consolation prizes" are not limited to a single industry. For example, when Morgan Stanley named its new CEO in 2023, it awarded the two runners-up special bonuses valued at $20 million each. - The size of a typical retention bonus for a non-CEO executive can range from 10% to 25% of their annual salary. However, some companies offer significantly more, with some awards reaching into the millions of dollars. - Critics argue that these bonuses can be a misuse of corporate resources, rewarding executives who were not selected for the top job and creating potential resentment among other employees. There is also the argument that these bonuses are a way of "buying loyalty" rather than addressing underlying issues that might cause an executive to leave. - Beyond a simple payout, these arrangements can sometimes include enhanced responsibilities or new titles to further entice the executive to stay. This dual approach of providing both a financial incentive and a new challenge is seen as a more robust retention strategy.