Background

The client retained Hugessen to consult on the succession plan for its retiring CEO and the compensation framework for an incoming CEO.

The Succession Committee was looking to emphasize the at-risk portion of the incoming CEO’s pay package, in order to address a perceived lack of connection between pay and performance. Another issue was that there was divided opinion among Shareholders / Board / Management as to whether the legacy profit-sharing program should remain in place moving forward.

While our client was a private company, it was directly comparable to major U.S. & Canadian publicly-traded metal companies, and the incoming CEO was arriving from an environment in which equity compensation comprised of a large proportion of at-risk pay.

 

Analysis/Work Completed

Following a comprehensive analysis of the Company's operations and current compensation structures, and extensive discussions with the Board and key executives, Hugessen completed the following tasks for the client:

CEO Pay Benchmarking:

  • Developed U.S. and Canadian industrial peer groups to inform the setting of appropriate target total compensation for the incoming CEO

Short-Term Incentive Plan (STIP):

  • Designed a performance scorecard based on financial performance, corporate milestones and individual performance measures

  • Worked with Board and Management to select specific measures and calibrate performance targets / payout opportunities

Long-Term Incentive Plan (LTIP):

  • Designed an equity-based performance share unit (PSU) plan based on a notional company valuation: a 50/50 blend of book value and net income, subject to a minimum of 75% of book value

  • Back-tested various performance multipliers for the PSUs (e.g. absolute and relative measures of revenue notional TSR etc.)

Total Compensation Projections:

  • Tested the performance of the incentive plans in the context of the desired total compensation for individual executives across a wide rane of operational nd financial scenarios

 

Outcome

A smooth transition at the CEO position was achieved, facilitated by term sheets drafted by Hugessen for the outgoing and incoming CEOs. The new long-term incentive plan was implemented, providing better pay-for-performance alignment and value creation opportunity for the incoming CEO. Modifications to the short-term incentive plan were also rolled out, refining the measurement of value drivers in the business.