CEO candidates who are not selected receive million-dollar bonuses as compensation
When a succession dispute for the position of CEO (president director) is reduced to just a few candidates, losing does not always mean losing out. Recent competition for this position resulted in robust compensation packages for the executives who came in second place.
When the Walt Disney Company in early February selected Josh D’Amaro to succeed Bob Iger as CEO, the entertainment giant awarded D’Amaro’s rival, Dana Walden, a stock package worth $5.26 million, as well as a recurring annual target compensation of about $27 million. And when Morgan Stanley named Ted Pick as its new CEO in 2023, it paid Pick, as well as Andy Saperstein and Dan Simkowitz, named as runners-up in the race, special bonuses valued at $20 million each.
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The flashy awards cap off a years-long trend in which companies pay millions to passed-over candidates for the CEO position, apparently so they can stay with the company.
The high figures reflect the size of the risk involved in retaining top talent. A leader who reaches the level of CEO candidate is likely to be a high-performing professional with broad institutional knowledge and deep relationships, both inside and outside the company.
The departure of a star of this size can disorganize operations, undermine team morale and harm the financial result, with the turnover of senior executives usually costing multiples of the professional’s annual salary.
Paying for executive loyalty works—up to a point. A recent report from consultancy FW Cook concluded that the packages have “a strong but limited retention effect — typically lasting approximately two to three years.”
This period probably reflects the vesting schedules for shares, says Marco Pizzitola, consultant at FW Cook and co-author of the new report.
“Once you receive all or most of the premium, the ‘glue effect’ of retention disappears,” says Pizzitola. “If you were already intending to leave the company in any way — whether out of frustration at not being chosen for the CEO role, at the end of your career, or for any other reason — if the retention package is the only factor keeping you there, you’re likely to move on.”
The right retention bonus
The FW Cook report analyzed 100 large American companies and identified 47 that changed their CEOs between 2016 and 2020. At about a third of these companies, boards granted succession-related retention packages to 39 executive nominees who did not become CEOs.
Companies were more than twice as likely to grant these packages when they hired outside CEOs, suggesting “greater concern” about an exodus of executives under the leadership of an outsider than in the case of internal promotion, says Pizzitola.
Executives who receive retention packages and leave the company earlier than expected typically lose the share they have not yet earned. It is relatively common for competing companies to attract passed-over executives and pay them the amount corresponding to the portion of the prize they would leave behind.
The packages are not symbolic — they involve real money. For non-CEO executives, values typically range between about $1.6 million and $5 million, with a median of around $3 million.
The range between $3 million and $5 million appears to be the ideal sweet spot: Recipients of awards in this range have the longest average tenure — just over four years post-succession.
Smaller prizes guarantee something close to three and a half years of loyalty. Interestingly, the largest packages are associated with even faster exits, in just over two and a half years. In these outliers, it appears that no amount is enough to stop a frustrated CEO candidate from jumping ship.
As for those who do not receive any retention package, among executive nominees who end up leaving the company, “those who did not receive such an award generally leave within the first year,” the report says.
Of course, not every passed over executive deserves a generous bonus to convince them to stay. And the way the succession process unfolds also makes a difference: some rejected candidates are so shaken by the experience that, for everyone involved, it’s best for them to go their own way.
Money speaks louder
Retention bonuses aren’t the only way to keep executives at the company, says Pizzitola. “Another practice we see is offering a new opportunity, expanding experience, transferring the person to another role,” he says. “If someone is looking, for example, for an international position, it is possible to place them as head of international business.”
Walden received both money and opportunity: In addition to the one-time bonus, Disney promoted the Hollywood executive to president and chief creative officer, making her the first person to hold that role at the 102-year-old company and putting her at the helm of Disney’s films and streaming series.
Offering runners-up “a new challenge” may encourage them to stay. But, according to Pizzitola, “often, in the end, the decision revolves around money.”
