Concerns about rising CEO pay — for salaries and severance — have filled the headlines in the last few years, with various groups calling for greater restraint.
But CIBC raised new concerns recently when it revealed its previous president and CEO, Gerry McCaughey, was being paid $16.7 million for 18 months — even though he was no longer in charge.
In April 2014, McCaughey had announced he would be retiring in April 2016 after nine years of service — effectively giving two years’ advance notice.
But in July 2014, the bank revealed it had found an internal successor to the CEO, Victor Dodig. As a result, the board chose to “accelerate” McCaughey’s retirement to September 2014.
And until April 2016, the departing CEO was entitled to base salary payments, monthly incentive compensation payments and continued participation in all pension and benefit programs — for a total of $16.7 million, according to a 2015 CIBC management proxy circular.
Essentially, it’s severance, according to Jane Milburn, a partner at Kuretzky Vassos Henderson in Toronto.
“In law, when someone gives advance notice of retirement and then they’re asked to depart early, it triggers the same kinds of obligations as in a term of employment without cause.”
But this is not your typical situation, she said.
“What’s unusual is that very often senior executives will have an employment contract at the outset of their employment or entered into at the time of a promotion, and it would be quite common to pre-agree in that contract about what advance notice an executive is required to give prior to either a resignation or a retirement. And it would be quite unusual for that to be as long as occurred in this case.”
Usually, someone in the C-suite would give advance notice of six months, possibly 12 for more senior positions, said Milburn.
But, sometimes, executives don’t want such a lengthy period as they would be restricted from accepting other employment.
“If someone has a 12-month clause, it’s highly unlikely that they can attract a new employer who is prepared to wait that long, whereas six months might be a possibility. So, to some extent, that time frame will depend on the seniority level of that individual and, realistically, their age because if it’s expected to be their last job, then the ability to move is less of a concern.”
The CIBC situation demonstrates why employers might want to put a cap on the period of notice in employment agreements, she said.
It’s an interesting concept, said Bernie Martenson, senior consultant at compensation firm McDowall Associates in Toronto. Usually, there’s a lot of discussion between the CEO and the board in terms of when they might be planning to retire and potential successors. It’s almost like managing a big project, with milestones that need to be met along the way.
“It would be very common in an employment agreement to see a minimum length of time to allow for some transition, like three months for example, potentially a little more with a more senior person. I don’t think I’ve seen a cap on an advance notice period — that’s something that would more normally be negotiated between the executive and the board and the organization, but it might make some sense to have a notional cap,” she said.
“I’m not sure that you’d want to put a cap on that in employment agreements because it’s more typically discussed for some time in advance, probably for several years before the CEO actually moves, several years or even more, because the board would be looking at the next level down and two levels down at possible and probable candidates, and making sure that the right kind of development assignments were put in place for the individuals.”
The CIBC situation looks to be about both retention and severance pay, said Martenson.
“What it appears to be is the board not having concluded on who would be the natural successor and, therefore, wanting to make sure they kept Mr. McCaughey around for a period of time to allow them to identify and appoint an appropriate successor and to give some transition time or changeover time if that was needed, if it happened to be somebody from outside,” she said.
“It looked liked… it got triggered a little sooner than expected and so therefore there was agreement to pay out the remainder of the contractual arrangement.”
But it’s a bit unusual because planning the succession of the CEO and other senior people is one of the most important jobs a board has to do, said Martenson.
“And it’s planning for if there’s been an accident or an early death, an unexpected death, or if it’s an orderly transition based on when someone wants to retire and when there’s availability of successors and making sure there’s enough time to develop those successors; if they’re internal, making sure they’ve got all the right experience. So it’s just a little bit unusual that it wouldn’t have been a little more advanced. And maybe it was — you can’t really tell from the outside for sure.”
In the circular, CIBC said the management resources and compensation committee began the CEO succession and search process more than a year before McCaughey’s decision in April of 2014 to set a retirement date of April 2016. (COO Richard Nesbitt also announced his retirement at the same time, giving 18 months’ notice.)
But, over the subsequent few months, the committee expedited the search process, which then accelerated his retirement.
(When contacted, a CIBC spokesperson said it was a board-level decision and “best to turn to the proxy for any language.”)
But it raises concerns as to how the succession planning process was done and what the board did or didn’t do, said Michel Magnan, professor and Stephen A. Jarislowsky chair in corporate governance at Concordia University in Montreal.
“They found somebody internally within six months but why didn’t they know that six months earlier? Why did they promise essentially two years?” he said.
“The board should know most of the senior managers, should have had some exposure with them, should… have done some succession planning in terms of identifying adequate candidates for the CEO position. So then you don’t need two years. If you admit you need two years, then you’re in really bad shape.”
Employers have to be prepared for C-suite departures, most certainly, especially with a more mobile workforce, said Martenson.
“Some of those candidates you might see as potential successors for the CEO may not want to stick around for that length of time either and may move on and be CEO for another company in the interim, so it’s a far more mobile workforce than it ever used to be.”
The terms of CEOs have been shortening over the years, said Magnan.
“CEOs last less years than before, so that’s a long-term trend.”
However, some CEOs don’t like having very elaborate succession plans around them because that makes them disposable, he said.
“Succession planning is often a tension point between the CEO and the board because of the fact that if you have a good plan, then as a board you gain leverage over the CEO — and the CEO knows this.”
But a big part of a CEO’s job is to make sure he’s grooming potential successors or potential candidates behind him, said Martenson.
“They will be assessed on that as well by the board and what I have seen has been more typically, ‘OK, in five years, I would see this person as my potential successor so let’s do all the right things to get them there.’ So I haven’t personally experienced it where it’s been a tense situation, (I’ve seen) where it’s been very much a managed situation and it would appear to be quite a comfortable agreement between the CEO and the board.”
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