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The Compensation Committee Handbook, 4th Edition by Michael L. Stevens, Stewart Reifler, James F. Reda

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CHAPTER 3 CEO Succession and Evaluation

The most important responsibility of a board of directors is evaluation of management succession, leadership development, and management evaluation, particularly for the chief executive officer (CEO) position. While the CEO often takes the lead for hiring and succession of other management personnel, it is the board of directors that is tasked with the responsibility of CEO succession and evaluation.

CEO succession planning must be in place in case the CEO dies, is disabled, quits, or, in some cases, is fired. In addition, there must be a succession plan in case the CEO loses the confidence of the board and/or the company's constituents. Thus, CEO evaluations must be done to determine whether the CEO's employment should be continued. Accordingly, proper and timely CEO evaluations are critical to the company and its shareholders, since the evaluation often will trigger the initial implementation of the CEO succession plan.

While succession planning and CEO evaluation are the responsibilities of the entire board, these responsibilities typically fall on the shoulders of the compensation committee, the governance committee, or a committee that usually includes all or most of the members of the compensation committee. The full board must be made aware of succession planning and evaluation by regular updates (typically in regularly planned executive successions).

Often abrupt or without warning, CEO departures can leave companies stuck in ...

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