Executive Recruitment and The Fast Growing Company

Prepared for:The Venture Association of New Jersey

Prepared by:

Steve L. McGrath

McGrath & Associates, Inc.

993 Lenox Drive, Suite 200

Lawrenceville, NJ 08648

(609) 844-7579www.mcgrathassociates.com

July 18, 2000

ORGANIZATION CHARTS

C F O C IO /C TO M K TG S A LE S B U S .D E V .

H .R . LE G A L

C E O

Entrepreneur/CEO

Before

After

Implications: How To Identify And Attract The Right Team In A Timely And Cost Effective Manner

CURRENT MARKET CONDITIONS

• Tightest Job Market In Thirty Years: Unemployment At An All Time Low

• Extreme Shortage of Qualified Candidates, Especially:

– Information Technology Professionals

– Sales, Marketing and Business Development Experts

• It’s a “Candidate’s Market”: Most Candidates Are Entertaining Multiple Offers, Including “Exploding” Offers With Short Time Fuses

• Market Conditions Are Fueling Wage Inflation Through Creative And Outstanding Packages

• Equity Participation Is Now The Rule Rather Than The Exception

Implications: Employers Need An Efficient Hiring Process And Must Be Prepared To Structure Competitive Packages

RECRUITING THE SENIOR MANAGEMENT TEAM

• Most Would Agree That The Right Team Is Even More Important Than The Business Plan, Vision Or Model

• Therefore, Attracting The Right Team Should Be The CEO’s Highest Priority

• How Does The CEO Identify The “Right” Candidates ForThe Senior Management Team?– Personal Network– Former Peers & Subordinates– Internet Postings – Help Wanted Advertisements– Search Firms

Implications: The “Need for Speed” Suggests That All Avenues Should Be Explored Simultaneously. However, The Time Commitment Can Be Enormous

TYPES OF SEARCH FIRMS

Contingency Firms• Most common type of firm, a.k.a.

“agencies”• Marketers of candidates• “Volume game”• Lower fee structure, lower level

positions• Only paid when candidate is hired

Retainer Firms• One third of industry but half of

industry revenues• Market clients and positions• “Efficiency game”• Higher fees, higher positions• These firms hired, and paid,

regardless of outcome

Contingency Firms Assume All The Risk

Retainer Firms Assume No Risk

AS A CLIENT, CONSIDER USINGA CONTINGENCY FIRM WHEN:

• The job is entry level or mid-level management, with salary usually $75,000 or less

• The job requires standardized, clearly defined skills

• Filling the position rapidly is more important than finding the ideal candidate

• It would be valuable seeing resumes on a continuing basis

• There are multiple positions requiring the same skill set

• It is important to fill the position at minimum cost

• The position can be filled locally, to save time and to avoid relocation costs

AS A CLIENT, CONSIDER USINGA RETAINER FIRM WHEN:

• The position is senior or top management, typically paying $75,000 or more

• The search will be a difficult, customized effort with a very limited candidate pool

• Finding the perfect candidate is more important than filling the position rapidly

• It is important to maintain strict confidentiality about the search

• The position is newly created and requires unfamiliar skills

THE MANAGEMENT TEAM/INVESTMENT “CATCH-22”

Consider The Dilemma:

• Mr./Ms. Entrepreneur Has A Plan For “ The Better Mousetrap”

• Business Plan Is Complete

• Funds From Friends And Family Are Depleted

• He/She Has An Incomplete Management Team

• Investors Won’t Fund Until Management Team Is In Place

Implications: The Entrepreneur Must Find Ways To Fill Out The Management Team. Compensation Creativity Is The Key

RECRUITMENT UNDER THE “CATCH-22” SCENARIO

• Recruitment Here Must Be Based Upon a “Trust Relationship”

• Candidates Must Be Prepared to Assume Substantial Risk (e.g., Accrual of Salaries)

• In Return For Candidate Risk Assumption, Entrepreneur/CEO Must Be Prepared To Offer a Premium Package

– Extraordinary Equity

– Higher Performance Bonuses

Implications: This Scenario Works Best When The Entrepreneur (CEO Operates With “The Abundance Mentality” i.e., The Bill Gates Model

COMPENSATION CONSIDERATIONS FOR THE FAST GROWING COMPANY

• CEO Positions Are Commanding Base Salaries of $150,000 And Up. Equity Participation For CEO Recruited “From the Outside” Can Be As High As 10%.

• Other Members of the Senior Management Team Are Receiving Base Salaries of Between $100,000 and $150,000 with Equity Participation That Averages 2%

Implications: Market Conditions Dictate the Packages. The Entrepreneur Must be Prepared to be Both Quick and Competitive

BENEFITS ISSUES

• The “Standard” Array of Benefits is Assumed By Candidates– Comprehensive Health Insurance Plans– 401(k) Plan– Vacation (Up to Four Weeks)– Performance Based Bonuses– Life Insurance

• Other Benefits Are Becoming More Prevalent– Additional Life Insurance– Club Memberships– Tuition Reimbursement– Day Care Assistance– Provision of Executive Coaching

RETENTION STRATEGIES

• A Very Effective Retention Strategy is to Offer a Portion of the Equity Participation Over a Multi-Year Vesting Schedule (e.g., Four to Five Year Period)

• Deferred Compensation (e.g., A Portion of Annual Bonus Over a Multi-Year Period)

• Vesting Schedule For 401(k) Participation Should Also be Considered as Part of the Retention Mix

Implications: Regardless of the Strategies Employed, The Best Retention Strategy, From the CEO’s Perspective, is to Continually Build the Value of the Firm.

EXECUTIVE SEARCH FEE AGREEMENTS

• The Industry Standard Fee for Retained Search is Where the Fee Equals One Third of Total First Year Cash Compensation (Base Salary, Bonus, Value of Options)

• More Creative Arrangements Call For the Search Firm to Have Some “Skin In The Game.” Examples:

– Taking a Portion of the Fee in the Form of Equity– Deferral of the Fee in Return for Future Considerations

• Two Times Normal Fee Payable When Financing is Secured• An Exclusive Arrangement For the Search Firm For an Agreed Period of Time• A Volume Commitment Offered To the Search Firm

Implications: Creative Fee Agreements are Becoming More Prevalent. You May Consider This to be a Key Qualifier When Considering an Executive Search Firm.