Interim CEO Contract and Compensation: Advice for Executives Considering Transitional C-level Roles

By Robert Adelson on 28 March 24   Executive Employment

This post was originally published in IvyExec on March 27, 2024.

In the fast-paced world of corporate governance, the departure of a CEO can send shockwaves through an organization, disrupting operations and potentially jeopardizing its future. When succession plans are absent, boards of directors often turn to interim CEOs to bridge the leadership gap until a permanent successor is found. For some seasoned executives considering these interim CEO positions, the challenge of stepping into a temporary leadership role to guide a company through transition or crisis can be a compelling opportunity to make a difference for an organization. However, before committing to such a critical role, it’s crucial to fully understand the company’s situation and expectations, as well as the employment and compensation terms, before accepting the appointment. This article discusses the different roles of interim CEOs and the different interim CEO contract terms each should seek in employment, compensation, and equity for the company that needs their services.

Why Companies Hire an Interim CEO

The departure of a CEO, whether due to resignation, retirement, or unexpected circumstances, may prompt the need for a temporary leader to maintain stability and continuity within the company.

The inability to secure a suitable permanent replacement within a reasonable timeframe may necessitate the appointment of an interim CEO. This situation often arises when prospective candidates decline offers or cannot assume duties immediately, prolonging the search process. In such cases, the interim CEO serves as a stabilizing force, providing leadership while the company navigates the complexities of succession planning. These “Placeholder CEOs” focus on continuity and transition, ensuring that operations run smoothly until a permanent CEO assumes the helm.

In instances where the departing CEO leaves amid turmoil or underperformance, the interim CEO may be tasked with more significant challenges. Referred to as Turnaround CEOs, these interim leaders are entrusted with the formidable task of revitalizing the company and steering it toward profitability and success. Turnaround CEOs are catalysts for change, leveraging their expertise to address underlying issues and set the company on a path to sustainable growth.

Get Company’s Full Disclosure in Your Interim CEO Contract

When considering an interim CEO position, external candidates should demand full disclosure of the company’s finances, business status, and reasons for the prior CEO’s departure in their interim CEO employment contract. For an outsider, this level of transparency is crucial for your protection. If proper disclosures are not included or referenced in your contract, if you do get blindsided, this may rise to material non-disclosure and, thus, potential grounds for termination for good reason and trigger severance. On the other hand, if you are an internal candidate, already with the company for many years, you would presumably require much less disclosure, assuming you already possess extensive knowledge of the company’s affairs.

interim CEO

Essential Interim CEO Contract Terms and Compensation

For executives considering interim CEO roles, negotiating compensation and contract terms requires careful consideration of the role’s nature and expectations.

For an insider interim CEO, executive compensation may vary widely depending on the employer’s business needs and the executive’s particular skills and experience. In cases where the company is doing well, the employer may offer a higher compensation, but at the same time will negotiate short employment terms and the flexibility to terminate the executive’s employment without paying severance. The insider executive who is taking on a much larger role should seek full insurance and indemnification.

For consultant turn interim CEOs, he or she should seek full settlement of prior consulting obligations and monies due for past services before starting the new interim CEO role.

For an outsider or turnaround CEO, the employment terms and compensation package will be more robust. Interim CEO contracts often extend for one year or longer, rather than “at-will”. Base salary is typically higher than that of the previous CEO to attract top talent, especially for turnaround situations. Severance benefits are also common, mirroring those offered to permanent CEOs. In addition, value creation or tax-favored equity compensation, such as RSUs, or Restricted Stock, or modified stock options, are typically included to supplement base salaries and bonuses, especially if the company is not in a financial position to pay market or higher rates. These equity incentives not only align the CEO’s interests with company success but also mitigate the company’s financial constraints, providing a stake in future profitability and potential exit events. Ultimately, a well-crafted equity package can compensate for lower immediate cash compensation while offering significant potential for increased take-home pay through much-favored capital gains taxes or even zero taxation upon achieving success.

All Interim CEOs Should Have an Employment Agreement

Whether you’re an insider or outsider taking on the role of interim CEO, it’s imperative to establish a formal interim CEO contract with the employer. This contract should accurately reflect the understanding you have with the company, on which you relied upon in accepting the appointment. It should include precise details regarding authority, indemnity, insurance, employment terms, compensation, severance, and equity.

This agreement holds particular significance for outsiders and those entering turnaround situations, where clarity and protection are paramount. Seeking the guidance of an experienced executive employment attorney to review the agreement is highly recommended. Typically, the company covers all or part of your costs associated with this review.

Interim CEO roles offer unique opportunities for leadership and growth, and by approaching them strategically, you can contribute to organizational success and enhance your professional reputation in the process. And structured correctly, the interim role can be quite lucrative as well, especially if you succeed in your mission.

 

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