A Guide to Getting CEO Transitions Right in 2020 and Beyond

Banks need to get CEO transitions right to provide continuity in leadership and successful execution of key priorities.

As the world evolves, so do the factors that banks must consider when turnover occurs in the CEO role. Here are some key items we’ve come across that bank boards should consider in the event of a CEO transition today.

Identifying a Successor

Banks should prepare for CEO transitions well in advance through ongoing succession planning. Capable successors can come from within or outside of the organization. Whether looking for a new CEO internally or externally, banks need to identify leaders that have the skills to lead the bank now and into the future.

Diversity in leadership:
Considering a diverse slate of candidates is crucial, so that the bank can benefit from different perspectives that come with diversity. This may be challenging in the banking industry, given the current composition of executive teams. The U.S. House Committee on Financial Services published a diversity and inclusion report in 2020 that found that executive teams at large U.S. banks are mostly white and male. CAP found that women only represent 30% of the executive team, on average, at 18 large U.S. banks.

Building a diverse talent pipeline takes time; however, it is critical to effective long-term succession planning. Citigroup recently announced that Jane Fraser, who currently serves as the head of Citi’s consumer bank, would serve as its next CEO, making her the first female CEO of a top 10 U.S. bank. As banks focus more on diversity and inclusion initiatives, we expect this to be a key tenet of succession plans.

Digital expertise:
The banking industry continues to evolve to focus more on digital channels and technology. The Covid-19 pandemic has placed greater emphasis on remote services, which furthered this evolution. As technology becomes more deeply integrated in the banking industry, banks will need to evaluate their strategies and determine how they fit into this new landscape. With increased focus on technology, banks must also keep up with leading cybersecurity practices to provide consumers with the best protection. Succession plans will need to prioritize the skills and foresight required to lead the organization through this digital transformation.

Environmental, Social and Governance (ESG) strategy:
Investors are increasingly focused on the ESG priorities and the potential impact on long-term value creation at banks. One area of focus is human capital management, and the ability to attract and retain the key talent that will help banks be leaders in their markets. CEO succession should consider candidates’ views on these evolving priorities.

Paying the Incoming and Outgoing CEOs

Incoming CEO:
The incoming CEO’s pay is driven by level of experience, whether the CEO was an internal or external hire, the former CEO’s compensation, market compensation and the bank’s compensation philosophy. In many cases, it is more expensive to hire a CEO externally. Companies often pay external hires at or above the market median, and may have to negotiate sign-on awards to recruit them. Companies generally pay internally promoted CEOs below market at first and move them to market median over two or three years based on their performance.

Outgoing CEO:
In some situations, the outgoing CEO may stay on as executive chair or senior advisor to help provide continuity during the transition. In this scenario, pay practices vary based on the expected length of time that the chair or senior advisor role will exist. It’s often lower than the amount the individual received as CEO, but likely includes salary and annual bonus opportunity and, in some cases, may include long-term incentives.

Retaining Key Executives

CEO transitions may have ripple effects throughout the bank’s executive team. Executives who were passed over for the top job may pose a retention risk. These executives may have deep institutional knowledge that will help the new CEO and are critical to the future success of the company. Boards may recognize these executives by expanding their roles or granting retention awards. These approaches can enhance engagement, mitigate retention risk and promote a smooth leadership transition.

As competition remains strong in the banking industry, it is more important than ever to have a seamless CEO transition. Unsuccessful CEO transitions are a distraction from a bank’s strategic objectives and harm performance. Boards will be better positioned if they have a strong succession plan to help them identify CEO candidates with the skills needed to grow and transform the bank, and if they effectively use compensation programs to attract and retain these candidates and the teams that support them.

Succession at the Top: Lessons Learned from CEO Transitions


10-11-13-Kaplan.pngThere is no more vital decision for a bank and its board of directors than choosing who leads the organization. Yet leadership succession represents a growing challenge, as banks too often lack sufficient executive depth or proper succession planning. In the worst cases, banks with both weak succession and performance issues may even be encouraged to find a merger partner.

Having conducted more than fifty CEO/succession search assignments, we have clearly seen that superior talent really does make a difference, especially for banks intending to remain long-term survivors. From those accumulated client experiences, we have identified the following seven lessons learned from CEO transitions:

Lesson #1: Succession Really Does Matter!
It is imperative that boards exercise their fiduciary and governance responsibilities, and grapple with the challenges of leadership succession. The continuity of leadership promotes continuity of strategy, and both regulators and governance activists are more focused than ever on succession. There is also a growing body of information which affirms that a lack of planned orderly succession can have a significant impact on the value of the company.

Lesson #2: Identify the Obstacles to Succession Planning.
Who is the stumbling block to planning for the bank’s future leadership? Is it the CEO who refuses to accept that he/she will not live forever, or are there directors who do not want to raise this issue with their friend the CEO? The board has a responsibility to tackle succession no matter how awkward it may be, so have these conversations early and often.

Lesson #3: The Succession Process Is as Important as the Outcome.
A robust, thoughtful and thorough succession process adds huge credibility to the board and the bank, regardless of whether your successor comes from within or outside of the bank. Take the time up front to ensure the alignment of your organization’s strategic plan with the ideal profile of your next CEO. The board can’t spend too much time getting to know its future leader.

Lesson #4: You Really Can Do It! Develop Your Own Methodology and Timeline.
Each succession situation and timeline is different, so there is no definitive template to follow. That being said, I would suggest boards begin efforts no less than 30 to 36 months before a potential transition of leadership. It is also very helpful to formally anoint a succession committee of the board (note: this is not a search committee) to take ownership of this process and manage the many critical elements along the path. That makes the succession effort more manageable and provides for accountability.

Lesson #5: It Is Critical to Handle Potential Internal Contenders Well.
Ideally, your succession planning process will promote the development of several internal contenders, and it is important to manage their expectations from the beginning. Handling internal contenders well has a significant impact on how they feel about the company, and how they see their future in the organization. Position the entire exercise as a developmental opportunity, and provide constructive feedback and specific recommendations for folks who are not selected for advancement.

Lesson #6: The Building Blocks of Talent Development Make a Big Difference Over Time.
Nearly all of the data on succession reinforces the idea that well developed internal successors perform better than outside hires. Thus, efforts to groom high potential candidates for more senior roles should be ongoing. Create a personal development plan for each individual with upside potential. Help them develop stronger and more varied technical skills, as well as more training in soft skills. Whatever talent development efforts you initiate, they will make your business stronger and aid the retention of your rising stars.

Lesson #7: Avoiding the Challenges of Succession May Have a Huge Downside.
Research from FTI Consulting shows that 43 percent of CEO transitions are unplanned. The bank’s value can be impacted by unexpected leadership changes, and such changes can make the bank more likely to sell out.

Institutions that we have seen survive and thrive over a lengthy time horizon have benefitted from the successful execution of strategy, which flows from a continuity of leadership. Bank boards of directors and incumbent CEOs must recognize this imperative, and regularly focus on succession and talent at the top of their agendas.