Transition Management Consulting, Inc.

Turnover at the Top: Preparing for Unplanned Change

by Robert T. Van Hook, CAE | Jan 01, 2004

Preparing your association for an unplanned change in staff leadership

Contingency plans that prepare for the loss of the organization’s CEO can help cushion financial and emotional costs associated with the departure.

An executive leadership change resembles a flat tire that causes a car to drive erratically-and costs time, money, and energy to fix. But an executive change will cost a lot more than a blowout and may be more disruptive. How the association’s board chooses to deal with losing its staff CEO can make the difference between an inconvenience and a costly accident.

Sooner or later executives leave their associations, whether by choice or by chance. Executives depart from their associations either voluntarily, through retirement or a new position, or involuntarily, through incapacitation, termination, or being forced out. Regardless of how an executive leaves, it is a major and potentially crippling event for the association. Hence, there is great danger in handling the transition poorly and great opportunity in doing it right.

In my work as an interim executive for organizations with transitional leadership, I’ve observed both effective and ineffective transitions. By recognizing the financial and emotional costs of executive transition-and planning ahead to minimize their effects on the association-the board of directors can do a great service to the organization.

Tangible and direct financial costs 
Direct financial costs of replacing a CEO-which generally include hiring and relocation expenses-are substantial and vary widely. In the 1992 study "Turnover and Return-on-Investment Models for Family Leave," researchers J. Douglas Phillips and Barbara Reisman estimate that the cost of replacing a top-level manager is about 150 percent of the manager’s base salary. While some costs are unavoidable, many associations do not have enough advance knowledge of the CEO’s departure to budget for the majority of the cost. These costs generally include:

  • Accrued annual leave. Many executives earn more annual leave than they have time to take, therefore, this payout can amount to a substantial sum-perhaps a month or two of accrued paid leave. Fortunately, this cost is one that is anticipated because associations are required to carry the accrued leave as a liability on their balance sheets. It does not, however, make the payout any less painful to the association. Conversely, it’s not as easy to anticipate other major costs of executive replacement:
  • Severance pay. Many executives’ contracts have provisions for severance pay if the executive is separated for reasons other than narrowly defined cause or if the board chooses to speed a voluntary separation by a payout for the notice period stipulated in the contract. Severance pay can range from 30 days to a year or more, with the average being from three to six months. According to John Wooldridge, a certified public accountant and partner with Langan Associates, Arlington, Virginia, while the basic terms are required to be disclosed in the footnotes to audited financial statements prior to separation or termination, severance contingencies are not accrued on the balance sheet. On the other hand, deferred compensation under a funded 457 (b) plan is carried as a liability on the association's balance sheet, but, because it is also carried as an asset, there is no net effect when the executive leaves.
  • Executive recruitment. Executive searches are costly. If the association board chooses to conduct its own search, the basic cost may be as low as $10-20 thousand, including advertising, travel, staff time, and legal work for reviewing a new contract. According to several search firm executives specializing in placement of top association leaders, some firms charge a percentage (often 25-35 percent) of the executive's first-year base salary, while others charge a flat fee, often $35-50 thousand or more. While expensive, a professional search may produce a better outcome in the long run and avoid the even higher cost of hiring an executive who does not fit the job or the organization's culture. Moving costs or other on-boarding costs can add $10-$20 thousand or more to the costs of executive replacement. 
  • Interim management costs. When an executive leaves, many associations appoint someone as acting or interim CEO to fill the gap until a new permanent executive is hired. If someone within the organization is selected for this role, the association may need to pay for contract or temporary help to complete the parts of the individual's job that he or she can no longer handle while filling the interim post. Another alternative is to outsource the interim management position, a cost that might be $15-$20 thousand per month or more.

Intangible and indirect costs
Some costs of executive transitions are less easy to calculate, but they are no less real. Without effective executive staff leadership, associations can slip into a kind of depression, which can result in less tangible, but still costly, backsliding. How do you calculate the cost of being adrift for four to six months without strategic executive leadership? While it’s difficult to attach solid numbers to organizational inefficiencies that result from an unstable environment, it’s clear that an organization will pay a price for the following situations

  • Missed deadlines
  • Key activities that slip between the cracks
  • Languishing of important relationships
  • Missed strategic opportunities
  • Loss of confidence in the association’s ability to perform to members’ expectations
  • Long-term cost of the knowledge lost through staff departures resulting from the lack of effective executive leadership

In his book Making a Leadership Change: How Organizations and Leaders Can Handle Leadership Transitions Successfully (2003, Author’s Choice Press), Thomas North Gilmore points out that even when a current executive resigns but remains in place until a new leader is found, the authority of the current leader can be undermined as staff begins to focus on the upcoming transition. By hanging on too long, a lame-duck leader creates a period of uncertainty and ambiguity similar to that felt when an acting leader takes charge on a temporary basis. People begin to envision the executive standing on the end of the diving board, and after a while they start saying, "Jump already!"

Transition opportunities
While in one sense an executive departure is a crisis, it is also a great opportunity for the association board to take stock-before the search process begins-of where the organization is, where it wants to go, and what kind of CEO can help it get there. The transition time is useful for bringing understanding of what worked and what didn’t work with the previous executive relationship. For example, as an interim executive, I once found board leadership confounded because they had not gotten enough communication from their departed executive. This situation stimulated a conversation about the frequency and nature of the communication that they would require in the future.

The transition period is also a time to bring closure to one part of the association’s history, while preparing for the next phase. I have seen staff cling to the operating style of the departed executive long after he or she has gone. Without bringing these changes to closure, the energy is misdirected and reduces the organization’s ability to move forward. Symbolism and ritual are powerful ways to help people achieve this. For example, at the beginning of one transition in which I was the incoming interim executive, the outgoing executive made a public presentation to me at an all-staff meeting of the office keys and some other symbols of his leadership. This fairly simple gesture gave the staff an opportunity to deal with their feelings in a ritualistic way.

An executive transition is also a good time to deal with troublesome operational problems so the new executive can come in and immediately address strategic issues. Most people agree that executives now have a honeymoon period of only about 90 days to begin to make a difference. An effective interim period can enhance the organization’s momentum by framing the issues for the new executive. Some boards choose to achieve this by hiring a professional interim manager (see details of this alternative in the section that follows). Others designate someone from the staff to take on the most significant of the CEO’s duties. In either case, the board should develop a process by which the associations operations are evaluated by either external or internal resources. The purpose of such an assessment should not be to place blame, but rather to find solutions to problems that can be implemented before the new executive comes aboard. Problems that do not lend themselves to immediate solution should be identified and framed for future work by the new executive. Using such a process-and often simply thinking about the executive transition as a time for growth and positive change-can breathe new energy into the association.

Protecting your association 
Here are some ways you can protect yourself and your association from the downsides of executive transitions and maximize your opportunities:

  • Work together. The best way to avoid the pitfalls of an executive change is for the executive to be effective in the job in the first place. The board should play an active role in creating an environment in which the CEO and the board act as strategic partners in making the association successful. The development of a personal relationship between chief staff and chief elected leaders is critical to building such an equal partnership. The ASAE CEO Symposium is an effective way for the executive and the board president to spend time learning about each other’s leadership and communication styles. Also, staff and elected leaders learn from their peers about how to work together more effectively. Other associations arrange their own leadership development programs with outside consultants who may work with the entire board and key staff leaders. Whether you use a training option or a facilitator may be less important than actually making the commitment of time and resources to the process and following through. 
  • Succession planning. Although it may feel a bit like planning for someone’s demise, succession planning is a good management practice not only for staff leadership transition but board succession as well. 

In the Winter 2002 issue of The Nonprofit Quarterly, the article “Executive Leadership Transitions: Critical Thresholds” states that “of an estimated 1.6 million nonprofit organizations in the US, roughly 10-12 percent are managing a transition in executive leadership at any given time.” The rate of transitions is expected to climb by 15 percent or more in the next five to seven years the baby-boomer generation-many of whom founded organizations 20 and 30 years ago-reaches retirement age." With those kinds of statistics confirming the reality of executive turnover, it’s wise to begin planning for your executive transition now. A succession plan is like an insurance policy for the organization, insuring against both the planned departure of the CEO and the CEO’s unexpected exit due to unforeseen circumstances, like a tragic accident or catastrophic illness. Make sure your plan addresses all foreseeable transition needs, including executive search costs and interim management. 

  • Be a careful contractor. Most CEO contracts today have some provision for paying severance if the executive is asked to leave for other than cause. Despite the fact that these contracts are negotiated and signed by the board, many boards are surprised to learn that they owe from 1-12 months severance pay. Boards should know what they are agreeing to and get legal help before they sign an executive contract. It is in the long-term interests of both the association and the executive that there are no surprises. 
  • Purchase key-person insurance. Key-person insurance is a relatively inexpensive way for associations to help indemnify themselves from the death or disability of the executive. Howard Soltoff of Foster, Soltoff, and Love, Ltd., Bethesda, Maryland, says that a payout under key-person insurance can include some measure of the association’s loss of revenue, interim management costs, executive search costs, and a multiple of the executive’s income for 12-18 months. Soltoff suggests that key-person insurance may also be designed to fund part of the executive’s deferred compensation plan, accruing cash value across time. Remember, however, that this coverage is valuable only in cases of death or disability of the executive. 
  • Save for your transition. Establish a reserve account as a self-funded transition insurance policy. Begin to put away funds to cover the potential severance payout and the costs of your executive transition, including executive search and interim management costs. Funding the full amount of a potential severance payout can give the association and the executive the flexibility and the resources to do the right thing when the time comes. According to a 2001 national study of 1,000 nonprofit organizations, the median tenure of a nonprofit executive is a little less than four years, so fully funding the estimated costs across a four-year period is wise.
  • Get the right interim management. If the association has a break between its departing and arriving executives, it must address the issue of management and leadership in the interim. Typically, boards have three ways of providing interim management during a CEO vacancy: 1) appoint an existing staff member; 2) recruit a volunteer from the board or membership that is willing and able to serve in an interim capacity; or 3) engage a professional interim CEO. Any of these three alternatives can work under the right circumstances, and each has different direct financial costs ranging from no additional cost for a volunteer interim to as much as $10-$15 thousand per month for a professional interim. While the latter represents a large sum, it is sometimes well worth the price. I’ve seen interim leaders being able to help avert the executive void in which staff may act out in negative ways: complaining, arguing, being frequently absent, and so forth. Having someone experienced at the helm can often minimize the kind of behavior, wasted energy, and staff turnover that have a negative impact on the organization. 

    Of course, it is important to make sure the association gets the right kind of interim executive to meet its needs. A turnaround specialist is appropriate if the association is in need of dramatic operational changes; a strong organizational manager may be called for if the association has impending projects or challenges and wants to make incremental operational improvements; or a caretaker may even be the right choice for the association that is most interested in preventing regression. 
  • Encourage and help the departing executive to make a graceful exit. In discussions with the CEO, the board might suggest several reasons for the CEO to focus on a smooth transition: 1) the departing executive’s legacy at the association can be damaged by what happens during the transition period, such that the CEO and the association will be better served by completing the transition smoothly; 2) leaving with grace and dignity can only enhance the CEO’s reputation; and 3) a well-executed departure may allow the CEO to take some much needed time off to recharge before starting his or her new position.

In the conclusion to their article "Executive Leadership Transition," Denice Rothman Hinden and Paige Hull say this: "We must continue to deepen the way we think about this type of [executive] change, acknowledging that leadership transition is both a natural part of the organizational life cycle and a tremendous capacity building moment. Yes, leadership transition is difficult. But more important, it is an opportunity to celebrate the legacy of the men and women who work tirelessly to make our world a better place, and to attract important new leadership into the work so nonprofit organizations will be there and be strong when we need them most." By anticipating executive transition and developing a plan to frame the process, association boards can do a great service to their organizations.

For questions about this article, please contact Jackie Eder-Van Hook at Contact Us.