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Succession Planning Best Practices

September 13, 2017

 

Corey C. Veneziano, CPA, MSAT
Tax Partner

Justin R. Morneault
Tax Senior

Succession planning is the process of creating and implementing plans to replace an organization's key members due to foreseen circumstances, such as retirement, or unforeseen resignations, deaths or disabilities. At one time, succession planning was a worst-case-scenario attempt to limit extended vacancies in executive level positions. With an aging baby-boomer population, and an estimated 40% of the U.S. workforce projected to be retiring by the year 2020, succession planning practices have changed. The purpose of this article is to identify and elaborate on the best practices organizations should consider in implementing a succession plan.

Assessment of Key Positions

Your company may be in a succession situation due to the impending retirement of its CEO or the company's founder and president. You know something needs to be done, but ask "What do I do first?" Best practices in succession planning consider that a companies limited resources do not need to be utilized developing succession plans for every position. Thus, the real question is, which positions should have a succession plan?

The answer to this question is unique to every organization, so it will vary greatly between middle market and multinational corporations. A controller? Accounting department manager? President? This step involves taking a strategic, high-level view of the organization to assess vital roles. Questions a succession planning team should consider under this best practice include:

  • What positions are critical to the business?
  • What behavioral competencies are required in the positions?
  • What skills, education, prior experience are needed?
  • Are there plans for new positions in the future?

Internal vs External Successor Dilemma

Now that organizational leaders have identified the key positions that need succession plans they should consider the pros and cons of internal versus external succession candidates. In recent years, vacant CEO positions have been filled by external candidates at a rate much higher than in the past. A 2016 survey found that over the past four years, 22% of CEOs hired by large public companies with planned succession plans were external—almost double the rate from 2004 to 2007.

The pool of external successor candidates may contain someone with better experience, skills and track record than anyone in the internal candidate pool. Recruiting external candidates, however, increases the risk of hiring charismatic leaders, who don't really have the experience and abilities necessary in the position. Additionally, the budgets of middle-market and closely held companies may not be capable of absorbing the $50,000 to $300,000 average cost of a full-service executive search.

Hiring an internal candidate provides someone who is more familiar with the organization’s culture, history and people—values a closely held company will particularly value. An internal candidate also comes with internal performance evaluations, providing documented strengths and weaknesses. Conversely, hiring an internal candidate may prevent an organization from recruiting an external candidate who may perform better in the position.

Building an Internal Pipeline From Within

Assuming organization leadership has deliberated, and wishes to look within for succession candidates, the final step is to develop processes which create a "pipeline" of internal candidates.

First step in developing a pipeline of candidates is thoroughly assessing the talent currently in the organization and identifying high-potential candidates. Experts recommend organizations look at personnel at all levels of a company. After identifying the candidates, plans need to be enacted to groom, develop, and retain those candidates. This may be accomplished in any middle-market company with formal, structured development plans, mentoring, and an emphasis on accountability for performance. Companies may look to create their own leadership programs, but should also consider the costs and benefits of employee development consultants.

The process of identification and development of key talent ought to be continuous and subject to ongoing review from human resources and current senior-level executives. By committing to genuine development of certain employees, both employee and organization benefit. Theoretically, by supporting a candidate's development, reciprocation will occur with employees committing extra job efforts and willingness to stay with a company supporting their professional goals.

For more information please contact Corey Veneziano, cveneziano@blumshapiro.com

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