Why is Succession Planning Important?
To ensure the long-term survival and success of your organization, a succession plan that arranges for a smooth transition to new leadership if the CEO or other key position needs to be replaced is vital. For effective succession planning, businesses must take it seriously. Fundamentally, it is identifying positions that may need to be filled unexpectedly — followed by identifying, grooming, retaining, and, if necessary, attracting potential replacements. Implementing a plan often requires mapping out how to fund ownership transition, preparing documents that lay out the transition's mechanics, and, finally, reviewing the plan regularly to keep it relevant.
Almost half of companies don't have a CEO succession plan.
Effective succession planning is estimated to increase company valuations and investor returns for large-cap U.S. firms by 20-25%.1 Despite the potential effect on company profitability, succession planning is typically neglected. A survey of Society for Human Resource Management members revealed 56% of their organizations don’t have a succession plan.2
Failing to plan for succession is risky. Talented leadership is subject to heavy recruitment from other firms. Disability and retirement can also produce unexpected gaps in company leadership. But reasons for succession planning extend beyond the need to replace missing leaders, including:
- It demonstrates commitment to the company’s future.
- Employees are more engaged when there’s a company vision and leadership that is working to help achieve it.
- Maintains board members’, shareholders’, and investors’ confidence.
When should companies begin succession planning?
It’s never too early to begin succession planning. It can take years to fully prepare candidates to assume key positions. And while some events, such as death, may be unexpected, even seemingly predictable occurrences like a partner’s retirement often happens sooner than expected. You never really know when a vital staff member will need to be replaced.
The succession planning process can be completed in seven practical steps.
Talent acquisition and retention is a primary part of succession planning. There are several steps to ensure it’s done correctly.
1. Envision when and why a succession plan might be needed.
There are many business, professional, and personal events that could prompt succession. These might include:
- A CEO, owner or other executive staff member accepts an attractive offer to work for another firm.
- An appealing offer to buy the business.
- Declining or unsatisfactory sales and profits.
- Market or industry changes that alter the firm's competitive viability.
- An owner, CEO or other employee in a vital position decides to retire.
- Disability due to illness, accident, or age.
The succession planning process necessarily involves evaluating the personal, professional, and business objectives of owners, CEOs, and other critical roles with an eye toward when they might be ready to step down. Involve partners, managers, and other stakeholders in discussions on these issues. Stakeholders may include important customers, whose potential reaction to a change in leadership should be plumbed before deciding how to proceed.
2. Decide which positions need a succession plan.
The CEO is an obvious candidate for succession planning. But evaluating the company’s objectives will likely reveal other positions that, if suddenly vacated, would spell trouble. For instance, if a well-established business has several senior executives nearing retirement age, a succession plan should address those positions in addition to the CEO. Next, planners need to determine and document the requirements for those roles.
3. Identify and advise successor candidates.
Successors are usually workers with high potential for advancement into key roles. In family-run companies children are often appointed as successors. Other businesses will need to develop external recruitment strategies targeting vulnerable job titles.
Surprisingly, succession planners often fail to discuss their plans with candidates. This is a mistake, as employees or even owner’s children may not want to advance within the business. So, it's always best to discuss the plan with the candidates themselves. Given these sorts of uncertainties, businesses will ideally have multiple successor candidates for each position.
4. Establish recruiting and retention strategies.
In succession planning, human resources will need to develop recruiting plans for unfilled roles and make sure that salaries and other compensation are adequately attractive. After talking with candidates, companies can better develop compensation and retention plans to ensure intended successors don’t turn down jobs offered or leave the company just before they’re needed. Also critical to keeping succession candidates on board: Ensuring they know that they're important to the company's future and have a meaningful role at the firm. Long-term benefits like retirement and employee stock ownership plans — especially those that require vesting of shares over an extended period — might also be attractive.
5. Develop and train candidates.
Successors usually need significant development before they're ready to assume a new role. Compare each candidate's current skills to the written job requirements of the role for which they are being considered. Talent management and development can help address any shortfalls.
CEO candidates are often broadly trained, having spent periods working in many different areas of the company. This approach may also be beneficial to non-CEO candidates. Cross-training can also prepare a talented candidate to perform more than one position if needed.
In addition to formal training, mentors who can share their experience and insights are often used in developing succession candidates. Mentors can also give proteges much-needed feedback to let them know how they’re performing.
Organizations may allow candidates to assume responsibilities for leaders when they are on extended leave or vacation. This enables them to evaluate candidate strengths and weaknesses in a real-world setting.
6. Implement the plan.
Succession planning is largely about people, but a variety of documents and funding mechanisms are also important. For instance, buy-sell agreements that describe how business ownership will transition are often used in closely-held companies. This document also defines who will sell, who will buy and the terms of the sale. Buy-sell agreements may call for owners to buy each other’s interests, for the business to buy back owners’ interest, or may specify further options for succession. Life insurance is often included in buy-sell agreements. For instance, policy benefits can supply funds to buy the interests of deceased partners. Disability insurance is also often used for similar purposes. Both types of coverage may be acquired for key positions, including CEOs.
A professional appraisal of the business' monetary value is also necessary. This will proceed sale of the business (should that be part of the plan), as well as set parameters for the buy-sell agreement and insurance benefit amounts.
7. Update the succession plan as needed.
The last step is to keep the plan updated. Annual reviews are standard, but in fast-changing business environments or if performance goals are fluid, plans may need to be updated more often.
The goal of succession planning is to secure the future of the company. It is a strategic approach that provides a roster of candidates to support the business’ mission long-term. For more information, including employee benefits planning, contact a Synovus Business Banker or Relationship Manager.
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