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CEO Daily Brief – Jan. 13, 2011

CEO Succession Plan at AIG Could Be Important as Government Readies for Divestment CEO succession is important at any company. …

CEO Succession Plan at AIG Could Be Important as Government Readies for Divestment

CEO succession is important at any company. Given some specifics at American International Group (AIG) it has extra importance.

Bloomberg News is reporting that AIG CEO Robert Benmosche could be asked to show the company is prepared to choose his successor. He started getting treatment for cancer in October.

The U.S. Treasury Department, which owns most of AIG, is expected to give up its role as the company is turned over to investors. As the sale of the government shares starts to unfold, Benmosche’s exact place in the company becomes important.

“For investors to feel comfortable, they probably should have some type of succession plan,” Frank Ingarra of Hennessy Advisors Inc., which oversees shares of AIG, told Bloomberg News.

Benmosche is expected to remain as CEO until the Treasury Department divests its ownership in the company, according to Bloomberg. The federal government arranged for a $182.3 billion bailout of AIG in 2008.

The company said a “long-term replacement” will be chosen sometime over the next two years, according to an Oct. 27 board statement.

It appears Benmosche remains popular with many stakeholders.

As a step to prepare for the sale of shares, AIG’s board may disclose details about Benmosche’s health condition, according to a report from The Wall Street Journal. In addition, the board may get a medical update from Benmosche and/or his physicians as they determine how long he will remain in the CEO’s post, according to The Journal.

Being upfront with investors makes sense for AIG’s recovery. But undue pressure should not be put on Benmosche. He has accomplished a lot for the company, and it appears he can continue to lead the company’s recovery.

For more about CEO succession planning at AIG, as reported by Bloomberg, please click here.


Executive Contracts Are Less Prevalent

Top executives used to enter into employment contracts with few exceptions. Both executives and companies liked the contracts.  Executives were protected from firing and companies had post-employment protections, such as non-competition clauses.

But more recently these employment agreements are not as popular.  Companies realized they often had to make large severance payments for CEOs who did a questionable job. For instance, Stanley O’Neil, chief executive of Merrill Lynch, got $161.5 million in severance pay in 2007, even though the business lost $8 billion on sub-prime mortgages.

Regulators, investors and shareholder advisory services now recommend boards not enter into employment agreements with top executives or perhaps scale back certain contract provisions.

It’s understandable that current senior executives may be reluctant to give up some of the provisions which benefit them.

Robin A. Ferracone, executive chair of Farient Advisors, recommends that boards and/or CEOs work with senior executives to give up select provisions found in these contracts or give up the contracts totally.

She suggests boards can say:

  •  Employment agreements are no longer in vogue.
  • If agreements remain, “gross-ups” and “evergreens” are dropped.
  • Such contracts “are no longer needed to be competitive in the marketplace.”
  • If contracts are dropped, executives will still have protection. Boards can enact policies that protect executives. Policies for groups of executives rather than individual contracts are often “less generous than contracts;” companies can make changes as needed; and each executive under the policy is treated equally.
  • Executives can be given some time for transition until policies are put into effect.

It’s clear that highly-paid, top executives will consult with attorneys about any changes in employment contracts. Boards need to be honest with their top executives if they want changes to occur.

For more about executive contracts, as reported by Forbes, please click here.


Promotions, Salary Increases Not Always Best Way to Recognize Top Employees

Promotions and salary increases are not always the best way to recognize top employees.  A recent Harvard Business Review article points out which employees are rewarded will be watched by others in the organization. There is reason for caution. “An employee who exceeds his targets but treats his team members poorly should not be rewarded in an organization that values teamwork,” the article points out. In addition, caution should be given with promotions. Companies may give high performing employees management responsibility rather than having them focus on executing corporate strategy. Businesses should have “multiple, flexible pathways to success” to “keep their best people, keep them engaged, and keep them for longer," the article said.

Some tips/questions include:

  • Is the employee able to do the new job?
  • How they perform their current job may help show how they would do in the new job.
  • Peers, members of the team and managed employees can give input about predicted performance in the new job.
  • Does the person want to learn more and have additional challenges? That would suggest they are ready for the promotion.
  • Are the responsibilities in the new job things they would enjoy? If not, they may not do well.
  • If it is unclear how the employee will do in the new job, companies can give them an assignment similar to the new job while still in their current post.
  • Is the new job a good fit for the employee? Perhaps they should be bypassed for one promotion until a good fit arises.

In addition, sometimes it is hard to estimate how much of a raise to give employees in a new job. Writing a job description, comparing the duties to those of others jobs in the company may help come up with an amount.

In the current economy, companies may be unable to promote and/or raise salaries of deserving employees. The employee should still be told that the company values them. Try to see if the employee can divide his/her time between the old job and new assignments, to keep him or her engaged.

For more about rewarding employees, as reported by The Harvard Business Review, please click here.

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