13 May 2024

Interim CEOs: Contracts & Compensation

Interim CEOs play an important role in a transition

Corporate governance is a fast-paced world. When a CEO leaves, it sends waves throughout the company. Such a departure can disrupt operations and put the future of the organization in jeopardy, requiring interim CEOs to step in. 

When a company doesn’t have a succession plan in place, a board of directors may turn to an interim CEO as a bridge in the leadership gap. Receiving an interim offer can be tempting, but stepping into such a role can be challenging for veteran executives. Guiding a company through a crisis or a transition can be a compelling way to make a difference and showcase your potential, though. 

Before you commit to a critical role like this, you need to understand the position and expectations of the company. Additionally, you need to know the employment terms and compensation package before you accept the offer. 

Below, we take a look at the different roles an interim CEO can fill as well as the different terms to seek for employment, equity, and compensation in exchange for your services. 

Why Do Companies Hire Interim CEOs?

Whether the previous CEO resigns or retires, the transition can cause a need for temporary leadership. Someone needs to maintain the continuity and stability of the organization after all. 

If a company cannot find a suitable replacement within a reasonable timeframe, it may seek to appoint an interim CEO. This often happens when a prospective candidate turns down an offer or cannot enter the role immediately. Prolonging the search leaves the company without critical leadership, and the interim CEO can help to stabilize the situation. Typically, a “Placeholder CEO” focuses on stability throughout the transition, helping to ensure the company runs smoothly until the next CEO steps in. 

If the previous CEO left due to underperformance, the company may task the interim CEO with addressing even more significant challenges. In these cases, the interim leader is a Turnaround CEO, entrusted with the revitalization of the company and guiding the organization toward profitability. A turnaround CEO is a catalyst for the organization, using their experience and expertise to address the underlying problems and forge a path forward. 

Get Full Disclosure in Your Contract

Transparency is crucial in these transitions. If you’re considering a position as an interim CEO, coming in from the outside, demand full disclosure on the following. 

  • Business status
  • Finances 
  • Reasons for the previous CEOs departure

If the company doesn’t include proper disclosures, you may get blindsided. Material non-disclosure can serve as grounds for “termination for good reason” and trigger severance in the event you need to depart. 

Alternatively, an internal candidate would require less disclosure so long as they have a full understanding of the organization’s affairs. 

an interim CEO after successful negotiations for an employment agreement

Essential Employment Terms & Compensation 

Negotiating compensation and employment terms requires careful consideration. You need to understand the position of the company as well as the nature and expectations of the role. 

Internal Candidates

Internal candidates’ executive compensation varies depending on the needs of the business and your particular skills and experience. If the company is doing well, the organization may offer more compensation. However, you will need to negotiate short employment terms, and they may try to remove the severance package altogether. Internal candidates taking on a temporary leadership role should seek full indemnification and full insurance. 

Consultants

Seek full settlement of your prior obligations and pay for past services as a consultant before you begin the interim CEO position. 

External Candidates

In these cases, the employment contract and compensation package are more likely to be robust. An interim CEO contract may last a year or more. Typically, the base salary may be higher than that of the prior leader to attract top players. This is especially true in a “turnaround” situation. 

Severance benefits may mirror that of the previous CEO. You may also negotiate equity compensation through RSUs or modified stock options. Equity supplements base salaries, especially when a company is not in a strong financial position in addition to aligning your interests with the profitability of the company. 

Ultimately, a well-crafted equity package compensates for lower cash upfront with the potential for a significant interest by the end of the contract. 

Every Interim CEO Needs an Employment Agreement

Whether you are an internal or external candidate, you need a formal executive employment agreement with the company. This contract must accurately reflect your understanding of the company’s position, which is the basis for your decision. Your employment agreement should include precise information on the following: 

  • Authority 
  • Compensation
  • Employment terms
  • Equity  
  • Indemnity 
  • Insurance
  • Severance 

The employment contract is particularly important for external candidates and turnaround situations. In these situations, clarity and personal protection are crucial. 

Executive Representation for Interim CEOs

An experienced executive employment lawyer can review your agreement to ensure you are fully protected. In many cases, the company may cover any costs associated for this review. 

Interim CEO offers are a unique opportunity to grow as a leader. When you approach the offer strategically, you have the potential to make a difference for a company and enhance your reputation. With the right structure, interim positions can also be lucrative, especially if you are successful.

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