Executive Retention Strategies in a Turnover-Heavy Market
“Where have all the people gone?” An HR executive recently posed this question, a question to which an answer is unclear. He was right, where are they? Turnover is on the rise and hiring more difficult than ever. There just doesn’t seem to be a pool of talent, and where talent exists, the cost of acquiring them, or even retaining them for that matter, is prohibitive. Since businesses rely on quality talent, finding the answer to this riddle has become the obsession of C-suite executives and their HR departments.
Now, the issue of employee retention has always been at the forefront for HR departments, but with the Great Resignation, Quiet Quitting, or whatever other label we place on it, the post-COVID employment problem remains the same…how do we effectively attract and retain quality talent in a difficult market?
According to a 2022 PWC study, 77% of executives identified hiring and retaining talent as critical to growth. This led all other factors, including innovation, pricing strategies, or even turbulent business environments. This same group of companies identified a talent shortage as the biggest business risk of 2022. The stories are much the same across dozens of surveys on the subject.
Utilizing simple averages across multiple survey sources on employee turnover and satisfaction, it becomes clear that the stories of turnover are not myth. Rather, turnover in 2020, 2021 and 2022 is higher than ever seen before, and while no company was immune, larger employers seemed to have higher turnover rates than smaller companies.
|Large Employers (>500 FTEs)||42.9%||48.9%||56.2%|
|Smaller Employers (<500 FTEs)||38.6%||41.8%||49.2%|
Replacement of these former employees is proving difficult as well. However, larger companies are having an easier time backfilling roles than smaller companies.
|Large Employers (>500 FTEs)||86.2%||83.5%||70.5%|
|Smaller Employers (<500 FTEs)||81.1%||80.7%||75.6%|
The question then becomes why are people leaving or not taking positions? Clearly, the first thing we as HR practitioners link to turnover is pay. But that is increasingly less of a reason than in years past. Remote work and work/life balance are far and away more prevalent reasons for turnover.
Reasons for Departure
|Remote Work Environment||68%|
|Hybrid Work Schedule||38%|
Now, there have been countless hours spent determining ways in which to enhance the attraction and retention of employees. So numerous are the buttons and levers to be pushed and pulled that it simply becomes a matter of figuring out what offerings meet the needs of your population, or potential population. As well as what fits into the business culture.
But do those same buttons and levers work for executives? What happens when the very people most concerned with turnover are leaving at alarming rates? Executive turnover has reached new highs over the past two years. According to a study conducted by Challenger, Gray & Christmas, U.S. CEO exits reached 774 in the first half of 2022, up 20% from this same time last year. Russell Reynolds conducted a similar study related to S&P 500 CFOs and determined that since 2021, 101 CFOs have transitioned out of their jobs. These are staggering figures, as executive talent is typically among the most stable population of employees. This begs the question…how do we slow unwanted executive turnover?
The Not-So-Simple Strategies
Unfortunately, we have entered a time where there is no single clear strategy that will improve retention at the executive level. Work-from-home, time-off, 401k enhancements, and the litany of other mechanisms used to solve general employee population turnover issues do not have the same impact at the executive level. The solutions become more complex and more expensive.
Retention-Focused Equity Grants
The easiest and most prevalent practice has been equity awards. While regularly provided equity grants are a staple at many public companies, the effectiveness of these awards at retaining executives has been diminished over the past several years due to the increased use of performance shares. Performance shares now make up an average of 60% of a CEO’s total equity award, leaving only 40% focused on retention.
To mitigate this issue, many companies in 2021 and 2022 provided separate, time-vested equity awards, that were intended to enhance handcuff levels on executives. Most commonly, these companies assigned three-year vesting schedules on the awards.
Coming in a close second to equity awards, long-term cash grants were also common solutions to the retention problem. The value and associated retention horizon were less than equity-based awards, but the effectiveness equal.
The main benefit of the cash-based award is also its biggest drawback. The value of these awards is fixed, meaning there is no risk, but also no upside opportunity. However, when retention is the goal, having a guaranteed value provides the best handcuff.
Supplemental Retirement Plans
SERPs (supplemental executive retirement plans) are commonplace in executive compensation programs. The values associated with these programs are often substantial and when structured properly, highly effective at retaining executives.
Often, the vesting terms of these programs are longer than traditional equity or long-term cash programs, making them superior in terms of retention, if the values are meaningful enough.
Many factors must be considered when developing these programs, but they have proved to be a wise alternative to traditional compensation arrangements.
Ultimately, the vehicle(s) selected for retention need to meet the goals of the award. Is the award intended to hold an executive through retirement? Through a special transaction? Until the market cools and opportunities lessen?
The importance of executive retention cannot be understated. The determination and execution of business strategy are built upon consistency. If executive turnover rates continue, the success of these businesses is at risk. Not to mention studies have shown a replacement cost of upwards of 2x the cost of the departing executive…if you can find a replacement. As such, assessing your retention risk and handcuff levels on executives is more important than ever.
Contact NFPCC for assistance with your executive retention strategies and ensure you have the leadership needed for your business to succeed.