Page 117 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 103

executive. As an example, a company with a high emphasis on salary (and by definition, low
on incentives) is likely to retain a steady performer but not the high-risk acceptor who
wishes to be appropriately rewarded for success.

Attracting Executive Talent

While companies usually express a desire to retain solid performers, they often do not pay them
as well as new people they hire for comparable jobs. The latter receive a premium to leave a
known and move to an unknown—increases of at least 25 percent are not uncommon. The
greater the risk of failing in the new job, the greater the required premium to attract the
person—pay may even have to be doubled. More and more executives recognize the need to
have a written agreement stipulating the pay package while employed, as well as the severance
package should employment be terminated by the employer. Employment contracts are
discussed in Chapter 6 (“Employee Benefits and Perquisites”). Executives recognize their
bargaining power will be significantly reduced once they have joined the company. It is critical
that an executive joining another company realize several things to avoid failure. First, the com-
pany is sending a signal that change is needed by bringing in an outsider (but those in the com-
pany will be minimizing the extent). Second, it is critical to learn quickly who can be trusted
and who cannot. And third, what type of culture does top management want to put in place?
Charging San Juan Hill without knowing the terrain will be hazardous to continued service.
The greater the need and the more risky the position, the greater the premium expected.
Thus, the individual who has moved every 4 or 5 years is invariably ahead in compensation,
after 15 or 20 years, of the individual who stayed with one organization—even though both
started out on the same job at the same pay, and both now have the same responsibilities.
Twenty years ago, individuals who had made several job changes were considered suspect, but
today the individual who has stayed with the same company is considered the oddity.
Organization structure can have a significant impact on the type of executive needed for a
particular job. With some companies, the group executive is a significant position, essentially
responsible for organizational changes and allocating capital to the appropriate division (based
on assessment of need and potential return on assets), and possibly defining markets and sales
strategies for the group. In other situations, the group executive is essentially a high-priced
liaison between the CEO and a number of autonomous divisions. Needless to say, these two
jobs call for different personality makeups and compensation packages.
Executive search firms work under either contingency or a retainer. The latter is paid
year-round regardless of the level of search, if any. Those who work under a contingency
arrangement are paid on commission—often a third or more of the pay of the person hired.
A combination approach is sometimes called a container. Sometimes firms will unbundle fees
and offer separately the research and interview costs. While obviously interested in the cost
of the search, the client is especially interested in the quality of the candidate. To test hiring
specifications, firms sometimes send a stalking horse candidate to the client, an individual who
is marginally qualified.
Sick companies especially are in search of an executive with instant healing powers.
Rather than simply the capable problem solver, they want the individual who is able to turn
around a crisis situation. Typically, this means controlling costs and increasing productivity
in order to turn a losing venture into a profitable operation.
Not only do many individuals look for a 25 percent or greater increase in total pay for
making the jump to a new job, but an increasing number also look for a front-end bonus. This