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Recruiters Must Exercise Their Options on Executive Pay

Fair and equitable compensation is a challenge which grips leaders at all levels of the corporate ladder. It is CEOs and Boards who often receive the brunt of the hostile objections to what are viewed as excessive rewards. While undershooting on compensation also provokes equally audible protestations among those who wish for the company to continue to attract market leading talent and retain it effectively. For many, the correlation between financial rewards and quality talent is incontestable. For others, the connection is more opaque and the financial gains seen as disproportionate.

Executive pay is therefore contentious, and in some quarters, even toxic. Investors forensically scrutinise pay to make sure that CEOs are, in their view, rewarded relative to the performance for which they’re responsible. This topic garners particular attention during the proxy season as companies reveal more detail on executive and board director compensation from the prior financial year. In the US, the introduction of Say-on-Pay as part of the Dodd Frank legislation has ushered in changes in executive compensation and seen pressure rise to place emphasis on long-term performance. How this performance is assessed is something for debate, but currently it seems that relative Total Shareholder Returns (TSR) is the current favoured mechanism, at least among healthcare companies, the sector with which I am most familiar.

The executive recruiting industry, which I represent, is often highly criticized for its role in perpetuating the problem of high pay. A situation that personally I do not recognise, nor do many of my industry colleagues.  It is true that we can do more to help our clients in the area of executive and board remuneration. However for intermediaries like recruiters, the antagonistic rhetoric around pay presents difficult challenges to constructively contribute to the conversation.

The problem for the executive search industry with pay is that it is seen as highly conflicted. Clients call upon us to supplement the advice they receive from remuneration consultants. However, because we have a stake in the game in the form of our candidate, we are perceived to influence to the upside, encouraging generous packages to ensure both the successful hire, but also adequate tenure to ensure they pass any rebate period. Furthermore, our independence is questioned because we are under the pay of those same clients. The commonly held notion is that recruiters are paid a percentage of whatever remuneration the appointed individual receives in their pay package. Our industry must do more to dispel this notion, as most top earning posts are often priced by fixed fee agreements or alternatively capped, thereby removing any incentive to bump up the package in the final negotiation.

But executive recruiters should not be deterred by these potential challenges, instead we should embrace them as opportunities. Executive recruiters have a role as management advisors and should offer balanced and constructive input to help companies workout the right compensation for the board directors and executive team. The sheer complexity presented by this highly geared system of financial cogs, pulleys and levers used for rewarding, incentivising and retaining outstanding talent, means that experts like executive recruiters can truly add value in advising Chairs, Boards and Executive Committees. We have the access to data and also the real-time market context to challenge our clients on pay and ensure they are remunerating appropriately for the job and the person, arriving at well-constructed competitive pay packages that incentivize and reward.

This is certainly something we’re engaged with at Liftstream. Our responsibility to our clients goes beyond the placement of executive management and board directors. We’re focused on being a partner to the board, giving them the advice, data and service to make long-term decisions around hiring, which also means we need to step up with solid evidence on pay. We’re going beyond the subjective and equipping ourselves with the data to have informed discussions with our clients about not only the level of pay, but the composition of the reward package. An example of this is the new study we published on Board Director and CEO Compensation and Governance for the biotechnology cluster of San Diego. The 31-page market data report provides detailed analysis of compensation data and trends, as well as presenting evidence of other important board related governance considerations.

In our view, executive recruiters can offer valuable independent advice to companies. We can be effective negotiators capable of brokering a good deal for clients, and shareholders. It is certainly true that many executives are rewarded excessively for the performance they are responsible for delivering, and while some might consider executive recruiters part of this problem, at Liftstream we’re intent on being part of the solution.

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