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Companies Need to Up Their Pay Practice Game

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Many companies follow best practices for motivating CEOs and other senior executives, but most don’t.

Larger private companies, along with private equity- and venture capital-owned companies, as well as employee-owned companies, are likely to follow best practices, but others are lagging behind. Our survey found that 40 percent of companies do not have formal long-term incentive plans, and among those that do, a mere 23.5 percent use performance-based vesting rather than time-based vesting.

This is not consistent with public company practices.

Not surprisingly, our survey found that larger companies by revenue behave more like public companies (see chart). Eighty-five percent of companies with revenues from $250 million to $499.9 million led the pack, followed by 80 percent for $1 billion companies and 62 percent for those between $500 million and $999.9 million.

In terms of ownership, 80 percent of employee-owned companies reported formal annual incentive plans, followed by PE-owned (73 percent) and VC-owned (63 percent) companies. Other types of ownership, such as sole proprietorships, partnerships and family businesses are far behind the top three.

For more information please visit www.ChiefExecutive.net/compreport

Who Approves CEO Pay?

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Approval of CEO compensation packages varies by both company revenue and ownership type, according to Chief Executive’s CEO & Senior Compensation Report 2017. Here we look at who’s in the driver’s seat when it comes to the CEO’s paycheck at private companies with revenue ranging from less than $2 million to more than $1 billion.

As the chart shows, at 54 percent of the smallest companies, the CEOs themselves determine their own compensation, with boards, partners and parent companies making the calls in other cases. For $1 billion-plus enterprises, however, boards are firmly in control, approving 90 percent of all pay packages.

Generally speaking, the survey found that the larger the company as measured by revenue, the greater the role the board plays in setting compensation. In the $2 million to $4.9 million range, the board makes the call at 46 percent of companies, while in the $50 million to $99.9 million range, the board weighs in 58 percent of the time. And for companies with $250 million to $499.9 million and $500 million to $999.9 million in revenue, the board determines CEO pay 67 percent and 79 percent of the time, respectively.

For more information please visit www.ChiefExecutive.net/compreport

The Importance of Perks in Executive Compensation

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According to Chief Executive’s 2016-2017 CEO & Senior Executive Compensation Report for Private Companies, CEO and C-Level perquisites matter.

While perhaps not as lavish or as prevalent as they are at public companies, there are some perks to which private company CEOs and senior executives have grown accustomed. Companies that want to remain competitive and attract the best and brightest executive talent should consider perks that are not necessarily costly, but go a long way to making the executive’s life a little easier. And, of course, CEOs and other senior executives negotiating their own pay packages should consider including these perks in their lists as well.

comp-chart

As the chart shows, the leading perks are personal technology, a company car and parking. All relatively inexpensive–and no doubt well worth it.

Employment contracts (#4), may require the board to think a little longer and harder about how to structure the right package. It’s worth considering less expensive perks such as club membership (#5) and gym memberships (#6) as well.

It is nearly impossible to get trustworthy private-company compensation practices and reliable analysis by experts. The 2016-2017 CEO & Senior Executive Compensation Report for Private Companies is the ONLY authoritative source of this highly valuable data. Offering a breakout of compensation data by company size, annual company revenue, and industry, the report helps to determine the right mix of short vs. long term compensation to retain your best people.

For more information, go to: www.ChiefExecutive.net/compreport

What CEOs Need to Know about Executive Compensation

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Compensation isn’t just about making sure people are paid enough to stick around. Compensation, especially at the executive level, is a strategic tool. If your firm does not consider executive compensation a driver of your strategic initiatives, you’re probably thinking about executive compensation in the wrong way. According to our research, most private companies are not optimizing compensation as a strategic incentive for their CEOs and senior executive teams.

There are many components of executive compensation CEOs should consider when planning internally. Below is a list of questions CEOs should ask as they consider their firm’s executive compensation strategy.

  • How will you measure the success of your plan versus its goals?
    Without proper tracking and measurement, your plan will not be held accountable for accomplishing it goals. Often, executive compensation plans need to be tweaked as the company grows and changes. Make sure to evaluate your plan regularly based on agreed-upon metrics and analysis.
  • What are the goals of your company’s executive compensation plan?
    The goals of an executive compensation plan can, and should, vary. Your compensation plan can provide incentives for executives to hit key operational benchmarks. Properly crafted, it also can improve your firm’s executive retention rate and your ability to recruit top talent. Whatever the goals, be sure to clearly understand them, communicate them and ensure your team understands them.
  • How much of our resources (time and money, especially) are we willing to invest in our executive compensation plans?
    Like any strategy you employ to improve your business, a well-crafted executive compensation plan requires both a lot of attention and discipline to maintain. Be sure you know how much you’re willing to invest before jumping in to an analysis and revamp of your executive compensation strategy.
  • How will you share long-term value with your executives?
    When it comes to long-term incentives, most companies initially think of some sort of equity-linked incentive. Distributing equity grants or stock options can be complicated; and on many occasions (particularly among privately owned companies), a phantom equity plan or an alternative long-term vehicle is more appropriate. Be sure to understand the implications of how you share long-term value with your executives, as well as the advantages and constraints of your company’s ownership type vs. public companies and other types of private companies. Benefits programs can supplement or replace incentives that are linked strictly to the company’s equity, but there are legal and tax implications that must be considered, as well.
  • How can your company distribute short-term incentives?
    Some short term incentive plans such as cash bonuses put undue pressure on the cash flow of businesses. For example, a business that pays executives a percentage of annual revenue may unexpectedly be cash-flow negative at the end of a given year when bonuses come due. Make sure to understand your company’s cash position and structure short-term incentives that are tied to the right short-term goals for your company (e.g., revenue growth or absolute EBITDA or cash-flow growth) and are consistent with your company’s financial resources.

For more information, go to: www.ChiefExecutive.net/compreport

5 Keys to Effective Executive Compensation

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A properly crafted executive compensation plan not only ensures you attract and retain the talent your business requires, it also effectively aligns the incentives for your executive team to the strategy and priorities of the organization.

The research for our annual CEO & Senior Executive Compensation Report for Private Companies shows that companies that prioritize structuring and implementing comprehensive executive compensation plans have better revenue growth and profitability than companies that do not.

An executive compensation plan needs to be thoughtfully prepared to ensure both short- and long-term goals are considered. These 6 keys below will help your company to properly implement effective executive compensation strategies.

1. Use Metrics as the Basis for Incentive Compensation

A common mistake for many incentive-based compensation plans is that they are not tied to specific performance metrics or goals. Discretionary bonuses provide the most flexibility. And there can be a discretionary component of an effective executive compensation plan, since not all objectives or situations may have been considered when the plan was set up. However, having short- and/or long- term incentives that are entirely discretionary is a missed opportunity to articulate clear individual and/or team goals and priorities to each of your executives. When there are specific formulas for bonuses and/or equity incentives, it aligns the executives’ focus and rewards those who deliver the desired results.

A best practice in setting goals and incentives is that they should be tied to metrics that each executive can influence or control (e.g. achieving profit goals for a divisional president or country manager, sales growth or revenue contribution dollar targets for a CMO or CSO, or recruiting success or employee alignment scores for a head of HR) vs. only corporate goals—and they should be SMART goals: specific, measurable, attainable, relevant and time-bound. This way, executives are aware of what they must focus on and they can optimize their work to achieve those specific goals. Sometimes macro metrics—like revenue and profit—are applicable, but, more often, there are better key performance indicators (KPIs) that should be used for executives who are responsible for a specific function vs. the overall business.

2. Effectively Communicate to Ensure Understanding

Another common mistake companies make is assuming that compensation plans are well understood by the executives. In reality, there often are huge communication gaps. Make sure every executive is fully aware of all of the components related to their compensation package, including the value of each of the benefits and perquisites they enjoy. And quantify the value and/or cost of these benefits and perks regularly—at least annually.

Often, executives take those benefits and perks such as health insurance or 401(k) matches for granted, unless the company quantifies what these other elements of the compensation plan are worth to them on a regular basis. Another common mistake is not communicating the value of any equity or long-term incentives on a regular basis as part of the compensation plan. Even if your company doesn’t have a formal annual valuation of the company’s equity, you can still give an estimate or illustrations of what their equity or long-term incentives may have increased by as part of the growth of the revenues and/or profit of the business. If you haven’t done a formal valuation, make sure you are explicit that your estimates are just that and aren’t binding.

If an executive does not have a clear picture of the total value of their compensation plan in their current position, the likelihood of looking for opportunities with more clarity of the upside is increased. Uncertainty is almost always bad for business, and this is a case where uncertainty on the part of a core team member can have unforeseen deleterious effects on a business.

Progress on a compensation plan should be addressed at least annually, outlining both short-term and long-term incentives. An even better idea is for quarterly communication—where the core metrics to which incentives are tied are discussed. This prevents any miscommunication prior to when the rewards are issued and help keep the employee motivated and aligned.

3. Benchmark Compensation Levels

If you’re trying to attract top talent, your compensation needs to be competitive, not just in your local market. Executive talent is portable—senior executives often do relocate for better opportunities.

Use external benchmarks from an independent third-party data source such as Chief Executive Group’s CEO and Senior Executive Compensation in Private Companies Report (www.ChiefExecutive.net/compreport) or a reputable executive compensation consultant who has access to a rich database of comparably sized companies in your industry, geography and situation.

In our research, companies often believe they are paying near the top-end of the spectrum for each of their executives when, in reality, they are at or below the median compensation level vs. similar companies who are competing for your talent.

Make sure the benchmarks you use are meaningful and relevant to your company. Use multiple reference points to compare your company and each position (for example, by revenue, industry, region and revenue growth) and look at quartiles, not just averages, to give you a much clearer idea of how competitive your compensation levels are.

4. Value Company Equity Regularly

In our research, more than half of the executives we surveyed do not have a clear idea of what their equity or other long-term incentives are worth, or how much they have increased in the past year. That is a huge waste of an expensive incentive, because most executives do not value what they can’t quantify. By granting equity-linked compensation but not tying it to any quantified value, you’re company is not getting the desired benefit of this long term incentive. And executives are not getting the positive reinforcement that they are benefiting from the increasing value of the enterprise or seeing the link with their efforts. In fact, many executives become skeptical or cynical of the value of their long-term incentives when they don’t get regular updates on the growth of their equity ownership.

If you plan on issuing equity-linked incentives, your company’s equity value should be appraised or estimated at least annually. At regular intervals (quarterly, annually, etc.), each executive should be told the estimated current value of their equity-linked incentives, as well as the expected future value.

5. Include Both Short and Long-Term Incentives

Providing a truly competitive executive compensation package usually requires that your executive team has both short- and long-term goals from which they benefit financially should their goals be met. A blend of incentive compensation that provides executives with cash incentives in the short-term tied to their achieving their specific goals and longer-term incentives—which in turn ties an executive to the overall success of the company—can help ensure your executive team is engaged and feeling rewarded for their hard work regularly.

Implementing an effective executive compensation plan does not have to be onerous, but it requires time, planning and dedication for it to work properly. We created our CEO & Senior Executive Compensation Report for Private Companies to provide businesses and their leaders with both benchmarks and best practices for their executive team.

To learn more please visit: www.chiefexecutive.net/compreport

Components of an Executive Compensation Plan

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The components of an executive compensation plan vary widely across companies. How incentive vehicles are structured and implemented vary even more widely. Below are the most common components of an executive compensation plan:

Base Salary
The standard wage paid to an executive that typically is the largest share of an annual compensation package.

Bonuses (Short-term incentives)
Distributions for annual milestones or reaching incentivized goals that are typically cash-based.

 Long-term incentives
Vehicles used to share long-term value creation with employees. These are often tied to equity or enterprise value.

 Benefits
Non-cash compensation provided to an employee on an annual basis. These typically include elements like health and life insurance, defined benefit or contribution plans, and paid vacations.

 Perquisites
Privileged grants to employees in addition to their other compensation. These can include everything from a company car to a business-paid cell phone.

For more information, go to: www.ChiefExecutive.net/compreport

An Election Like No Other

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election-1It’s no secret that uncertainty has a dampening affect on economies, and election years are, by definition, a time of uncertainty. In fact, once the nation’s new leader is anointed, sluggish voting-year growth is often bolstered by a post-election “relief rally” as businesses breathe a collective sigh of relief and get on with things. But this November—with the two top presidential candidates so diametrically opposed on so many compelling issues—just might be different.

According to a recent survey by U.S. Trust, 68% of high-net-worth executives and business owners are concerned about the impact of the presidential election on their companies. In fact, depending on whether Donald Trump or Hillary Clinton becomes president—and on which candidate each business leader has bet—some American CEOs’ worries may go sky-high by Inauguration Day.

CEOs can make a positive case for either candidate: Clinton, who had a front-row seat to the action while serving as First Lady and then went on to develop her own formidable political skill set in Congress as New York’s senator and as the country’s secretary of state, may be viewed as the experienced and steady hand. Meanwhile, Trump can be seen as the no-nonsense, billionaire hero who can’t be bought and will unleash a new era of business growth by taking a Roto Rooter to sclerotic Washington, D.C.

Yet, what may be much more persuasive to many CEOs is the negative case against whichever candidate they fear more. And that decision is often based largely on fears around how the new administration might impact our economy and the business climate. (See this sidebar, for the perspectives of four top economists.)

One block of CEOs believes that the election of Clinton would ensure nothing short of disaster in the years ahead, as she continues what they see as the anti-business philosophy of President Obama, tries to wring even more taxes out of the 1 percent and scrambles for the government to fulfill all the economic promises she’s made to her growing coalition of what some describe as the “47% of Americans who pay no income tax.”

The other block is just as frightened at the prospect of Trump as the next president, with their trepidation fueled by saber rattling on trade and immigration that may translate into policies that will throw the U.S. economy into reverse. They also fear the simple uncertainty a Trump presidency would bring, because the unknown is one of the worst things for business decision-making.

FEAR-FUELED FAVORITES
Put another way: Many CEOs fear Clinton could decelerate the U.S. economy by adding taxes and regulatory burdens over the next eight years, while others fear Trump could blow up the U.S. economy almost immediately by turning it over like an apple cart. “The choice between Clinton and Trump is really a choice between the lesser of two evils,” says Robert Johnson, CEO of the American College of Financial Services. “There is a time-worn adage—‘the markets dislike uncertainty’—and Trump epitomizes uncertainty.”

Indeed, it’s a curious twist when a lifelong progressive activist who’s never held a job in business becomes the presidential choice of significant numbers of business leaders. But Clinton is the devil they know versus the one they don’t.

Johnson believes that neither candidate is “appealing” to CEOs but that many of Trump’s promises to shake things up are “very concerning and potentially disruptive to business interests.” Meanwhile, although Clinton advocates higher taxes on wealthy Americans, “she definitely has more of a track record that business people can rely on.”

CEO Lessons Learned from a Severe Cyber Attack

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cyberattackHarding had to endure a series of painful television interviews where it quickly became clear that she had no idea who the attacker or attackers were, how many of the company’s 4 million customers had been affected and what kind of security risks they faced.

‘They have been rather unkindly described as the hostage videos,” Dido told Management Today of the media coverage. “I really don’t look my best, and they do look as though I was being held prisoner in a DIY store.”

Harding’s frank admission comes as studies show CEOs aren’t taking cyber attacks seriously enough—and aren’t prepared for the public fallout when they occur.

A recent survey commissioned by security firm Tanium of 1,530 senior executive and nonexecutive directors in the U.S., UK and Japan found that more than 90% could not read a cybersecurity report and were not prepared to handle a breach.

“One thing I think I know more keenly than any other British CEO is that every single one of us is underestimating the importance of cybersecurity.”

Even more surprisingly, around 40% of respondents said they didn’t feel responsible for the repercussions of hackings.

But company leaders will be held responsible. And that’s something Harding had to find out the hard way.

“We thought we were taking it seriously, outside experts were telling us we were taking it seriously. Patently we weren’t taking it anything like seriously enough,” she told Management Today.

“One thing I think I know more keenly than any other British CEO is that every single one of us is underestimating the importance of cybersecurity.”

Harding isn’t the only executive to be recently taken off guard.

Swift CEO Gottfried Liebbrandt told the Wall Street Journal in June that his outspoken fears of a cyber attack still didn’t prepare him well enough for a series of security breaches at the funds transfer platform.

As outlined in Chief Executive, CEOs can take a number of steps to prevent cyber attacks, including continuously updating software, encrypting all data and using ad blockers.

But they’ll also have to be prepared for the worst.

And Harding, at least, has no regrets about coming clean with the public,.

‘If being open and honest with my customers is naive then it’s fine with me,” she said. ‘I’m still here, living proof that sometimes it’s OK to admit to your fallibility.”

Why the Chief Communications Officer is Pivotal to the CEO, Especially a New One

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With a real-time news cycle, constant disruption in the business environment and the rise of highly active stakeholders—empowered through digital platforms to share their opinions and organize for action—are the norm. As a result, having a strong communications function not only is advisable, it’s essential.

The Arthur W. Page Society’s report on The New CCO describes not only the forces that are transforming enterprises, but also the resulting transformation through which the chief communications officer (CCO) is taking on a far more important and strategic role.

CEOs have always been surrounded by a cadre of advisors, but in recent years they are increasingly closest to their CCO. To hear Jack Welch, the legendary former CEO of GE tell it, the CEO’s relationship with the CCO is a close and important one built on two things: truth and trust. “The CEO and the CCO have a unique relationship,” Welch said at a Page Society event last year. “Total trust. Very intimate. In it together. Buy-in on the mission. Buy-in on where the company’s going and how you’re going to get there.”

“The CEO and the CCO have a unique relationship. Total trust. Very intimate. In it together. Buy-in on the mission. Buy-in on where the company’s going and how you’re going to get there.”—Jack Welch

According to the Page Model for Enterprise Communications, the role of the CCO begins with activating corporate character—the distinct set of values, purpose, mission, culture, beliefs and actions that compose the identity of the enterprise. A strong and authentic character is essential to earning the trust of stakeholders. Around this character, the CCO works to produce meaningful engagement with stakeholders that ultimately earns their support and advocacy. The CCO has to be able to manage communications risks and opportunities with all stakeholders, including customers, employees, investors and the general public.

Whereas CEOs present company vision and culture, CCOs are responsible for the strategy of defining and activating both. In a recent survey by Korn Ferry, 67% of respondents from Fortune 500 companies stated that the most important leadership characteristic for CCOs was “having a strategic mind-set, defined as anticipating and seeing ahead to future possibilities and translating them into breakthrough strategies.”

In the common occurrence of a CEO transition, it makes sense that the CCO would play a vital role in ensuring the transition is smooth, stakeholders are kept up to speed and that the new CEO’s vision aligns with the internal corporate culture. To put it simply, the CCO is charged with protecting the reputation and legacy of the outgoing CEO, while ensuring acceptance of the new one. For this reason, they often best understand the benefits and pitfalls that may arise from the leadership change.

It may be equally important that the CCO have that same trusted relationship with stakeholders inside the organization to facilitate a seamless transition. After the merger in late 2013 between US Airways and American Airlines, our new management team was comprised roughly of half of its members from the former US Airways and half from the former American. Wearing the hat of CCO meant working hard to ensure new members of the management team were integrated and felt included.

For those on the legacy US Airways team, there was much familiarity with Doug’s leadership style and vision. But Doug was adapting to a larger and more complex business and that group needed to adapt as well. For those on the legacy American side, there was certainly more hesitancy around speaking openly without having had that history with their new CEO.

To avoid feeling like the haves/have nots, we took a lot of care to get everyone integrated very quickly. This started, and continues today, with a weekly Monday morning meeting where all our vice presidents gather in person and by phone to review the previous week’s operating statistics, revenue results, and people engagement activities. Establishing this regular cadence of updates told people very clearly that regular engagement and transparent communication matter greatly.

Doug Parker is a very approachable leader, and his direction at those Monday morning gatherings relayed something even more critical; that is, what kind of culture the new company was going to aspire to create. Here, allowing one’s vulnerabilities to show through and using humor were two of the behavior attributes that helped create a unified team of leaders very quickly after our merger.

The CCO responsibility became much more than an information facilitator; it became a private sounding board so that our new colleagues could ask questions about acceptable behaviors and potential perceptions. And that role worked both ways, from advising new colleagues who weren’t always sure what new protocols would be accepted to advising Doug when he needed to make adjustments for the betterment of the new team.

CCOs can have a highly valuable and productive partnership with their CEO, especially following a transition, by:

1. Managing internal politics to help the enterprise be prepared for a transition through sound succession planning.
2. Establishing alignment between the new CEO’s vision and the company’s culture, and creating ample opportunities for the CEO to represent both.
3. Ensuring that values and vision for the company are not only communicated, but also are activated through clear policies and actions.

To win the support of C-Suite colleagues, CCOs must be fully integrated communicators, using a combination of data analytics, cultural intelligence and behavioral economics to develop insights they can leverage to bring corporate character to life. The ability to do so ensures the success of the CCO and ultimately has a trickle-down effect that benefits the entire company.

Mastering the Monarch Succession

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CEM_SONNENFELD_GSThe ferocious Viacom board battle between Sumner Redstone and his deposed, failed successor Philippe Dauman provides drama to rival the intrigue of HBO’s series Game of Thrones, not to mention Orson Welles’ film Citizen Kane, Shakespeare’s King Lear, Shelley’s “Ozymandias” or the biblical King Saul.

Dauman, despite years of Viacom’s collapsing stock price and declines in creative programming, tried to fortify his own troubled reign. He’s charged Redstone’s daughter Shari with manipulating her 93-year-old, frail father, who controls 80% ownership of Viacom and CBS. Redstone has held the Viacom throne and CBS’s controlling enterprise, National Amusements, for roughly 50 years, routinely terminating successor candidates. The saga is a timeless theme we see often in show business and parallels the long reigns of movie moguls like Louis B. Mayer of MGM, Lew Wasserman of MCA Universal and Paramount founder Adolph Zucker, as well as others in the media, including CBS founder William Paley and publishing magnate William Randolph Hearst.

When I wrote The Hero’s Farewell, I labeled this CEO departure style as that of a “monarch.” They only exit feet first—through a palace revolt or dying in office, as commonly found in creative, personality-infused businesses, such as fashion, technology and media. Boston Consulting Group founder Bruce Henderson suffered one such palace revolt. Despite a tight autocratic rule, he faced multiple insurrections (e.g., the spinout of rival Bain & Co.) before his own ouster. Also leaving feet first, IMG founder and renowned super-agent Mark McCormack, died at 72 with no clear successor. Entrepreneurs from Ralph Lauren to Facebook’s Mark Zuckerberg and Alibaba’s Jack Ma are current examples of CEOs with the controlling votes to thwart genuine, planned succession.

These common, tragic sagas do not have to be the only scripts for such personality infused businesses. Consider these 5 exit strategies.

“Instead of clinging to a throne, a creative leader can serve a short tour of duty.”

1. Active board intervention. Michael Eisner’s terrific first decade at Walt Disney disintegrated in his second decade. Suspecting Eisner efforts to derail succession, the board appointed Senator George Mitchell as board chairman above Eisner. Ultimately, the highly regarded Bob Iger assumed the CEO position. Meanwhile, in 2015, after a decade that saw Disney’s stock triple, Iger announced his own retirement date (2018), carefully reviewing candidates for succession.

2. Incumbent humility. Time Warner’s Gerald Levin tried to extend his troubled rein by placing humble former banker Richard Parsons at his side, assuming Parsons’ lack of show biz background would ensure he was not a threat. Yet, Levin left in 2002, a year after the disastrous AOL merger, leaving Parsons in charge to stabilize things and smoothly pass the reins to the highly successful insider Jeff Bewkes.

3. Intergenerational partnership. Cable pioneer Ralph Roberts seamlessly transferred formal power to his carefully groomed son Brian, who brilliantly has built out the enterprise with NBCUniversal, as well as Xfinity.

4. Selling out. Another path often taken by monarchs, who fear anyone sitting on their throne, is selling the firm. Jim Wiatt surrendered the helm of the William Morris Agency with its 2009 takeover by Endeavor. ABC’s Leonard Goldenson did the same in 1985 when, after 30 years on top, he merged the network with Capital Cities Communications.

5. A governor’s mission. Instead of clinging to a throne, a creative leader can serve a short tour of duty, like a state governor, and then move to new ventures. Quincy Jones has soared as a musician, record exec/broadcaster (Qwest), publisher (VIBE), producer (Fresh Prince of Bel Air) and more. Chester Bowles co-founded an advertising giant, then sold his shares and stepped out as a top official for FDR. He later became governor of Connecticut, ambassador to India and Nepal under Truman, an under secretary of state for Kennedy, and finally, Nixon’s ambassador to India.