Attracting the Best Executives

August 20, 2011

OVERVIEW [top]

For any corporation, hiring executives poses high-stakes challenges. For small but surging entrepreneurial firms, filling top jobs can often make or break the company’s growth.

Because as many as half of all executive-level hires end in firings or resignations ["Hiring Without Firing," by Claudio Fernandez-Araoz. Harvard Business Review (July 1999): 108-120], it’s crucial that you approach the process systematically and structure an overall compensation package that will attract and retain the best people.

Don’t assume that generous stock options will satisfy top candidates. While fast-growing companies often use options to reward executives for long-term performance, the market’s volatility since March 2000 has led many firms to offer other forms of compensation, such as issuing restricted stock and performance-based bonuses.

In this Quick-Read you will find:

Ways to structure pay packages to attract top executives.
Nonmonetary factors you can use as recruiting tools.

SOLUTION [top]

Ideally, you’d probably love to appoint one of your rising managers to fill each executive post when it opens up. But many emerging-growth firms lack such a deep bench. If your company employs 100 or fewer people, then it’s almost impossible to assemble a talent pool that allows you to fill the executive ranks from within consistently.

Whether you look inside or outside for candidates, realize that recruiting executives tests your ability to combine an appealing compensation package with a sales pitch that strokes the candidate’s ego, passion and career aspirations.

In terms of money, you’ll want to dangle at least three types of long-term incentive programs for executives. In a 2000 study of 350 U.S. industrial and service companies’ proxy statements by William M. Mercer Inc., nearly all of the companies (99%) offered long-term incentive plans of some kind. Stock options were the No. 1 type of incentive, provided by 100% of the companies with long-term incentive programs. Long-term performance awards were provided by 86.2% of these companies; restricted stock was granted by 85.9%.

While the Mercer study involved large corporations, it shows what you’re up against in luring candidates who may reap a trio of potentially lucrative incentives if they join a big company. Even if you lack the resources to compete with huge conglomerates, you can compensate executives in other, equally powerful ways.

High-level managers obviously want a competitive salary. But don’t fight pay wars when you’re outmatched by deeper-pocketed competitors. Instead, here are five elements that can lead executives to look beyond cold, hard cash.

Work quality. Executives have reached the point in their professional lives when they know what kind of work they enjoy and how to harness their strengths. Sell them on how the job gives them a chance to do what they love.
Development opportunities. Don’t assume that executives no longer want to learn and expand their skill sets. In fact, a fast-growing business can give them exposure to a wide range of assignments that they wouldn’t get in a larger company.
Work/life balance. Executives may be hesitant to join a young firm for fear of getting caught up in a stressful, 24/7 job. Assure them that while you ask for their commitment, you value the need for them to enjoy life outside the office.
Stimulating work environment. A growing business can offer a more satisfying, exciting climate for an executive who’s tired of bureaucracy or predictability.
Leadership. If you’re an inspiring entrepreneur, your personality alone can lure executives to want to participate in your company’s success.

Don’t overlook short-term incentives, such as annual performance-based bonuses. If you rely exclusively on long-term incentives (i.e., bonuses based on goals of at least two years), candidates may look elsewhere to avoid deferring their rewards.

Finally, hire executives who want more responsibility. They should show initiative and savor the chance to serve on your management committee. Trying to prod a less ambitious individual to accept a high-level job may backfire if that person resists "stepping up" to exercise more authority.

REAL-LIFE EXAMPLE [top]

Attracting top executives to Belleville, Ill., takes creative recruiting. Just ask Debra Voges, executive vice president of Belleville-based Roesch Inc., a component manufacturer of appliance parts with 118 employees and growing global operations.

Voges prefers to promote from within. Finding outstanding leaders inside the company isn’t hard, but two obstacles can arise that force her to look outside:

If there’s no one in-house to fill the slot that would result if a manager is promoted into the executive ranks, then Voges may leave the manager in place and recruit an outsider for the executive post.
If managers excel in their job and express little or no interest in moving up, Voges will not bully them to accept a promotion. She grants their request to stay put and hires outsiders.

When Voges needed a sales manager, for instance, she offered the job to a star salesperson who refused it. So Voges ran a newspaper ad and posted the job on the Web. A top candidate wanted to work from home full-time because she hoped to start a family, so Voges agreed to invest in a home office.

"We paid her about the same salary as we’d pay someone who came into the office every day," Voges says. "It has worked out great. We don’t even notice she’s not here. We communicate constantly, and she’s only thirty miles away when we need to see her."

DO IT [top]

Check salary surveys before finalizing your pay package. Many consulting firms do annual surveys targeted by industry and job level. Several are linked from the Quick-Read "Passing the Fair-Pay Test." Because these surveys ask "incumbents" how much they’re paid in their current position, you may want to offer executives 10%-20% more as a premium to join your firm.
When recruiting an executive, prepare to explain how much, if any, of base salary includes bonuses. Compare that figure to your industry average. Example: Direct reports to a CEO generally earn 25%-40% of their salary in bonuses, according to Joe Mallin, an executive compensation specialist at William M. Mercer Inc.
When discussing compensation with executives, emphasize a "total reward" strategy beyond pay and benefits. Discuss quality-of-life factors, personal growth and other intangible advantages of joining your company.
Never delegate the screening and interviewing of executives to your management team. Involve them in the hiring process and solicit their input, but don’t detach yourself and make judgments bas
ed solely on their opinions. Invest time interviewing and courting the top candidates.
If you’re making a midcareer hire, that often poses serious implications for retirement. Executives in their forties (or older) may require some form of "make up" for retirement benefits accrued at their current employers. Prepare to negotiate some form of Supplemental Executive Retirement Plan (SERP).

RESOURCES [top]

Books

101 Hiring Mistakes Employers Make …and How to Avoid Them, by Richard Fein (Impact, 2000).

Pay People Right! by Patricia K. Zingheim and Jay R. Schuster (Jossey-Bass, 2000). Chapter 13, "Rewarding Executives."

Handbook of Executive Benefits, by Towers Perrin (Irwin, 1995).

Internet Sites

Web articles

Hiring Stress Questions

Ecomp. Joint Information Inc. Executive compensation numbers.

Journal articles

"Meet the New Super Temp," by Evantheia Schibsted.

"Write Effective Ads to Recruit managers" by H. Kent Craig. Contractor 48:1 (January, 2001).