Canadian HR Reporter

Canadian HR RepoRteR december 15, 2014 executIVe serIes 21 in Toronto, who also spoke at the event. For one thing, it's not just about off ering the biggest number you can muster. "Whenever we open the papers and we read about executive com- pensation, we see these gigantic numbers. And I'd just like to re- mind you that they're sort of like the elite in executive compensa- tion. ey're like the people who get $20 million when they make a movie — there are a lot of starv- ing actors as well. ere are a lot of CEOs in this country who are never covered in the media," he said. It's more important to focus on the compensation structure than to focus too much on the fi nal number — and structuring com- pensation to create both short- and long-term incentives can be tricky. "How do you develop compen- sation plans that align with im- mediate short-term shareholder interests, as well as the long-term best interests of the enterprise?" said Levasseur. "It is really challenging for us to help organizations develop programs that will also incent and reward senior executives for longer-term plans." You also need to design incen- tive plans that measure the right metrics — you need them to be objective but still fl exible, he said. Also important? Finding a way to minimize CEO compensation "hedging." "What that really means is… (the CEO) designed a program where if you do well, you win and if you lose, your severance pack- age is so high that you've won any- way. at is really the defi nition of hedging," said Levasseur. "I'm not suggesting that there shouldn't be severance pack- ages… because you're not going to attract (talent) without them. However, you have to be care- ful about the elements that are included in your package." Internal vs. external Another important consideration is whether to opt for internal or external candidates, said Beaudin. Increasingly more organizations are focusing on external candi- dates — especially those with prior CEO experience. "From 1970 to 2000, the (num- ber) of companies that looked outside to replace their CEOs went from one in seven to one in four. And then, by 2008 — so less than a decade later — 80 of the Fortune 100 companies who appointed a new CEO, 45 of those went outside to fi nd a successor," he said. "Organizations are taking much less of a risk on a fi rst-time CEO and they increasingly turn to peo- ple who have done the job before. "At the extreme, I think what we've seen also in the last de- cade is the retired founder CEO comes back. So that would be, to me, the ultimate expression of not wanting to take the risk on a new CEO." But hiring externally can in- fl ate costs signifi cantly more than hiring internal candidates, said Levasseur. He and a colleague looked at TSX companies' data from 2012 and 2013, and com- pared the 12 new CEOs hired in that time period. "We found out that external hires were six per cent more ex- pensive than the predecessor CEOs… and the internal promo- tions were 12 per cent less expen- sive than the former CEOs," he said. "In this particular sample, the median (cost) was $8 million if you came from the outside, and a little over $4 million if you came from the inside." Hiring external candidates usually involves heavy nego- tiations and lawyers, which can drive up the compensation, said Levasseur. "Any way you look at it… it is an expensive process. Which prob- ably begs the question: Why are we not developing more CEOs internally?" Organizations should strongly consider succession planning and building up the internal leader- ship pipeline, said Levasseur. But, at the same time, it's im- portant to fi nd a candidate who is up to the growing challenge, said Beaudin. Adaptive ability is a defi ning characteristic for the success of today's CEOs, he said. "Intuitively, you might think, ' at makes sense.' But if you think about the people in your depart- ment, how many people actually are able to demonstrate that kind of fl exibility, both interpersonally and intellectually?" Case study: TMX Group The TMX group has gone through an extensive evolution over the past 14 years — which has meant the role of its CEO evolved as well. "If you think back to the beginning of the 2000s, TSX (the Toronto Stock Exchange, which is now owned by TMX) was one product, one place, doing one thing, and that was really equity trading," said Mary Lou Hukezalie, senior vice-president and group head of human resources at TMX Group in Toronto. "Over time, we've seen the advancement of broader types of trading… (but) we didn't drop anything, so you see the increase in complexity." And as the business changed, so did the type of leadership that was needed. TMX went through a number of signifi cant transitions in just a few years, one of the more signifi cant being its acquisition by Maple Group in 2012, which brought about major changes to the organization's board. "The Maple board is a very different board than we would have had prior (to that)," she said. "When you think about getting 18 people to decide on something, the complexity of that just challenges the broadest thinker." Those board members are actually the owners — not just the shareholders, said Hukezalie, so their interest in who is leading the company, and how the organization is motivating and incenting that individual, is very clear. "The evolution of what was required from the CEO was actually happening in real time with our now-retired CEO," she said. The average tenure of a CEO at TMX is somewhere around the fi ve-year mark, said Hukezalie. "And in fi ve years, if you think about the shelf-life of a CEO and you think about what strategy is all about, strategy is about the long-term consequences and the long-term direction of the fi rm. A new, incoming CEO takes a while to just get the wind under their sails, and then they've got to advance the troops," she said. "In fi ve years, it's very, very hard to measure what the impact of that is, so it takes a long time to fi gure out: What is the CEO's performance?" It's particularly complex at TMX because it is in a heavily regulated industry, has a public interest mandate and is a for-profi t company with customers that are also competitors, said Hukezalie. So when the former CEO announced in March 2014 he would be retiring, TMX launched a long and complex search process. It had to contend with international competitors that pay CEOs in a certain way, and banks, which pay CEOs with a longer-term focus. "In reality, when we came to the talent base and what we could afford, the kinds of people in the banks that we would have liked to have had access to were already above our price point," she said. "Interestingly, the Canadian talent was almost unaffordable to us — and the global talent was, in fact, more affordable." They put a search committee together, comprised of the board chair and the HR committee, among others. "Each of those individuals came at the search and what they thought the CEO needed to be from a very different perspective. There was, however, unanimous support for the search committee, and so the job of the search committee became as much part of bringing that disparate view of what the CEO needed to look like as fi nding the person who could fi t that profi le." Lou Eccleston, an American with former senior roles at Bloomberg and Thomson Financial, was appointed the new CEO of TMX in September 2014. The complex search process was an indication of the seriousness with which the board weighed the decision, said Hukezalie. "The board views this as the most important decision they will make. And that's because they can't possibly know what goes on on a daily basis in your fi rms, and so the CEO is their proxy… and so you're putting your faith in the individual's ability." ceo < pg. 10 Short-, long-term incentives internal and external business environmental scans. • Use scenario planning to shake up perspectives of the future, comfort with the status quo and to foster fl exible thinking. • Identify talent in terms of real capabilities and business needs. Focus on strategic needs, not tactical quick fi xes that may not contribute to the longer term. assumption 3: The risk in- herent in the job is so great that executives who demand exten- sive "golden parachutes" must be accommodated. When so much eff ort has gone into selecting the right CEO, why set a high reward for failure? With CEO tenure de- creasing, shouldn't the emphasis be on incenting success? Possible responses: • Just because there are business challenges, organizations are not precluded from selecting a CEO with a stewardship mentality. Sustainability and growth with a stewardship focus set the board and organization up for success in both the short- and long-term, striking a balance with what shareholders value today and fu- ture success. • CEOs often fail due to personal attitudes rather than technical or business skills. ey need to look at the organization today, value its strengths and provide a path for all in the organization to grow toward what is needed in the fu- ture. is comes from having a leader perspective and knowing she can't do it on her own. is requires the CEO to seek advice, information and other views. • New CEOs need to be set up for success. is requires clear iden- tifi cation of support structures for transition, clear and realistic criteria for success in the short term, and participation in devel- oping success criteria for the lon- ger term based on stewardship. • Organizations need to demon- strate investment in CEO suc- cess and in their own compen- sation structures. Regardless of how good a candidate seems, there are other fi sh in the sea. e preferable situation is a can- didate who feels fully supported and who is more invested in pro- viding stewardship and success than being rewarded for failure. Organizations and boards that don't develop strategic capabili- ties to manage and mitigate the current trends toward hiring a gunslinger with the built-in black- mail of a large golden parachute have already failed to think and act strategically. at does not bode well for their future. Karen Gorsline is SCNetwork's lead commentator on strategic capability and leads HR Initiatives, a consulting prac- tice focused on facilitation and tailored HR initiatives. Toronto-based, she has taught HR planning, held senior roles in strategy and policy, managed a large decentralized HR function and directed a small business. She can be reached at gorslin@pathcom.com. BlAck hole < pg. 11 Develop strategic capabilities "organizations are taking much less of a risk on a fi rst-time ceo and they increasingly turn to people who have done the job before." New ceos need to be set up for success.

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