In an ideal world, companies would always appoint a permanent CEO for the long run by following a well-thought succession plan. However, the world is an imperfect place, and circumstances sometimes require quick action and an interim solution. Not having a leader in our current competitive and fast-paced corporate landscape creates lasting ripple effects that can be felt for years.
When companies find themselves without an immediate CEO successor – whether because a successor was not previously identified or a designated successor is not ready in a sudden emergency – an interim CEO must be appointed. Typically, the interim CEO provides operational stability and expertise while the board conducts due diligence in searching for and selecting a permanent CEO who will design and lead the organization’s future.
The role of interim CEO is unique in every organization, and there are important nuances to consider when setting interim-CEO pay:
Assessing the company’s unique situation will help in setting the most appropriate compensation package. In turn, we tend to see a wide range of compensation packages in terms of structure and quantum, as they are situation specific.
Several key decisions are required when appointing an interim CEO, and each one helps inform the compensation package.
The process for identifying a temporary CEO should be set before an unexpected vacancy triggers the need for a replacement. Having a thorough succession management process – including a future-focused CEO success profile, an emergency succession plan and internal candidate readiness assessments – is key to being ready for identifying candidates for interim CEO from both inside and outside the company. In addition, having a robust CEO onboarding process will be critical as well to ensure the success of the interim CEO.
Length of service depends on the circumstances that have created the temporary vacancy. Interim CEOs serve in the position for as few as five days and for as long as two years. Based on our research, interim CEOs serve for five months on average.
An interim CEO may serve only to ensure smooth operation of the company until a permanent CEO takes over. Alternatively, an interim CEO may be required to undertake additional responsibilities such as initiation of new projects or directing the organization toward stronger financial and operational positions. Understanding the interim CEO’s priorities and anticipated length of service helps guide decisions related to their pay structure.
Every day, these factors help inform organizations about who will be selected for the role of interim CEO, and how they will be paid. WTW’s Global Executive Compensation Analysis Team (GECAT) reviewed the public filings of S&P 1500 companies that appointed interim CEOs between 2019-2023. (Note: Proxies filed during any given year reflect compensation and decisions made the previous year. The most current full year of proxy disclosure at the time of this writing was 2023.)
Through this analysis, we identified 142 instances of interim CEOs (excluding company founders who transitioned into the role).
Unsurprisingly, those chosen to take on the interim CEO role have a specific set of abilities, a track record of success in business and leadership experience:
Our analysis focuses on interim CEOs who come from the executive team or board of directors. It excludes outside recruits, who typically are selected because the company may be experiencing a shock event or turnaround situation that requires external leadership.
When a company finds itself without a CEO, 55% select a named executive officer (NEO). Prior to being named interim CEO, more than one-third of these NEOs held the position of CFO (Figure 1).
Having been a member of the former CEO’s internal team, an NEO possesses the ability to promptly assume CEO responsibilities temporarily and deal with the organization’s immediate challenges. Compared with pay of the former CEO, 77% of named interim CEOs earned at median:
The other 23% did not receive additional compensation for their temporary service; however, 80% served in the interim CEO role for 3 months or fewer.
When executive candidates are unavailable or not ready to take the helm even temporarily, it is common to appoint an interim CEO from the company’s board of directors. Board members are well-versed in the company’s business strategy and current situation, and they tend to have established relationships with other executive officers.
When the interim CEO is selected from the board, a non-executive director who is not the board chair most frequently fills the role (Figure 2). In our experience, non-executive directors are selected because of uniquely important experience, such as having been a CEO at another company within the same industry.
Having worked directly with the company’s prior CEO, the non-executive board chair can be a sound alternative to fill the interim CEO post. Of directors who were appointed interim CEO, 38% were the non-executive board chair.
Moving from the board to an interim executive position includes a new title and new compensation. Pay for a non-employee director serving as interim CEO switches from typical board pay – generally comprising cash and equity retainers – to compensation that more closely mirrors that of the executive team.
Among directors serving as interim CEO, 88% received compensation in recognition for their service. At the median, directors serving as interim CEO received $1.3 million cash compensation (cash plus bonus).
In several cases, director interim CEOs received higher fixed pay compared with the outgoing CEO’s pay, to offset limited participation in incentive programs (e.g., just 31% of directors participated in the company’s annual incentive plan). However, 22% received a special bonus; these were provided for either signing-on to serve as interim CEO or for the successful completion of the interim service. The median value for this special bonus was $500,000.
In addition to cash compensation, directors received $1.5 million in stock-based compensation at the median. Ninety-one percent of stock compensation received was in the form of restricted stock/restricted stock units (RSUs), most commonly cliff-vesting after one year. While restricted stock/RSUs were the most prevalent vehicle, 20% of interim CEOs were granted stock options and another 14% were granted performance-based LTIs (Figure 3).
| Ratio of interim pay to former CEO pay* | Prevalence of interim CEO: board* |
Ratio of interim pay to former CEO pay** | Prevalence of interim CEO: executive** | |
|---|---|---|---|---|
| Cash compensation | ||||
| Base salary | 100% | 98% | 82% | 100% |
| Bonus | 100% | 31% | 52% | 93% |
| Total cash | 66% | 98% | 65% | 100% |
| Total stock compensation | 20% | 71% | 37% | 96% |
| Total direct compensation | 44% | 100% | 53% | 100% |
* Interim CEO from the board; ** Interim CEO from the executive team
Note: All compensation used to calculate ratios have been annualized and reflect median values.
Source: WTW Global Executive Compensation Analysis Team review of public filings of S&P 1500 companies
Interim-CEO compensation can vary significantly depending on the company’s demands and circumstances (including the anticipated time horizon) as well as the qualifications and expertise of the incoming interim CEO. Knowing the ratio of interim CEO pay to former CEO pay best allows the company to structure interim compensation – and allows for deviations from the median when necessary.
While you hope to not encounter an unexpected interim CEO situation, the reality is that such situations take place – as some of your company’s board members may have experienced at other companies. Be prepared and have a game plan in place.
A version of this article appeared in Workspan on September 19, 2024. All rights reserved, reprinted with permission.
