Retention planning: Considering C-suite turnover

In order to retain the key members of the C-Suite it is critical to execute a winning retention strategy. A common strategy to limit post-succession turnover is what we will call “retention grants”. Retention grants come in many forms and are customized for each executive based upon their age and objectives. Retention grants add “sticking power,” so the company has success as well as the executive.

The problem

Smaller employers (under 500 full-time employees) experienced turnover rates of 38.6% in 2022. The cost is significant. Culture is negatively affected, and it takes a lot of time for the entity to have cultural consistency. Decisions relating to executive pay have an indelible impact on the entity, as shown. When compensation is managed carefully, it will align executive behavior with the company’s strategy and generate better performance. When managed poorly, the effects are devastating, such as, loss of key talent, demotivation, poorly aligned objectives, and poor performance and return.

Unfortunately, we are living in a time where no single strategy guarantees an improvement at the executive level. Paid time off, work from home, and profit-sharing enhancements may work at the employee level, but not at the C-Suite level. The solutions are much more costly but can be designed in a way whereby recapture and profit potential does exist for the entity.

Reasons why many executives leave and create cultural chaos:

• Better pay

• Work/life balance

• Remote work environments

• Hybrid work schedule

• Better benefits

The solution

Supplemental Executive Retention Programs (SERPs) are customized plans that focus not only on retention, but on providing re-capture to the entity providing the benefit. SERPs take on different forms, including entity owned insurance, restrictive bonus arrangements and split dollar programs. The plans are life insurance funded programs because life insurance values grow tax deferred, death benefits are income tax free, and distributions from life insurance can be designed to be income tax free. There are no other financial instruments which allow for the same treatment. Thus, returns on investment (ROI) are greater when compared to assets within similar classes.

In making decisions relating to compensation, most entities try to keep up with what their peers are offering. This is short-sighted, as it needs to incorporate the fact that bringing executive talent into the not-for-profit space does not afford the executive the same level of potential. Executives in the not-for-profit space are comparing their compensation programs to the plans of their friends and colleagues in the closely held space.

Boards and Directors have wrestled with determining compensation. There are several nuances that need to be taken into consideration. For example, there are challenges in finding suitable entities that can be used as a benchmark for your own compensation plans. Some boards feel that benchmarking and publicly available data have created a “race to the top” mentality, causing compensation packages to be artificially increased over time. Most entities must find balance through customization to meet the needs of each executive in order to guarantee continuity, succession, and positive attitudes that run deeply throughout the organization.

Modern Capital Executive Solutions is a consulting firm rooted in the credit union space providing full services across the country to C-Suites & Boards with expertise in the executive benefits/retention planning arena.