Headhunters: Casting For A Different Set Of Characters

Search firms are no longer focusing on the top slots

With AT&T, Quaker Oats, Delta Air Lines, Unisys, and Apple Computer--to name a few---conducting highly public searches over the past year for chief executives, you might think that all the action for the big executive search firms is at the top. But it turns out the number of CEO searches is actually down this year.

So where are the hunters hunting? Further down the food chain, according to a soon-to-be-released quarterly report by the Association of Executive Search Consultants (AESC). For the first nine months of 1997, the survey of 115 executive recruiting firms found, the hunt for general management positions (nongeneral managers reporting to proxy-level executives) rose 56% over the same period in 1996. Searches for division heads and general managers rose nearly 8%. But searches at the CEO, chairman, and president level fell 16%. Searches for outside directors were down 7%.

POST HOLES. What's going on? In part, say recruiters, the falloff in top-level searches--as well as the pickup in lower-tier ones--are natural consequences of the explosion in outside CEO recruitment in 1995 and 1996. "With such heavy activity, you eventually have to see some cooldown," says Paul R. Ray Jr., AESC chairman and president and CEO of search firm Ray & Berndtson.

Moreover, many freshly minted CEOs are putting their stamp on organizations by bolstering management teams with new faces. That's the case with Delta Air Lines Inc. CEO Leo F. Mullin, who has hired SpencerStuart to find him a new chief financial officer to help carry out his plans. "The CEO has to make sure there's a commonality of vision and strategy," Mullin says. "It's a rare occurrence that a new CEO would come in and find everyone that he needs." More than airline experience, Mullin wants the new Delta CFO to have leadership qualities and serve as his "chief partner."

There's another factor driving the search for upper-level managers: In a still robust economy, job-hoppers have left many posts empty. In the first half of 1997, workers changed jobs at the highest rate of the decade, according to estimates by the Bureau of National Affairs Inc. It's not likely to slow: 46% of 5,000 execs surveyed last summer by interim management firm IMCOR, a division of Norrell Corp., said they expected their next job to last between one and five years.

CEOs--as well as their boards and investors--are also paying more attention to succession planning at all levels. This is a reaction to the long period of downsizing in the 1980s and 1990s that decimated much of the middle-management pool at large corporations. "Companies have not in the recent past been investing as heavily in bringing people up," says John S. Wood, consultant at Egon Zehnder International Inc. "If they're not able to grow them, they have to go get them."

PepsiCo Inc., a well-regarded breeding ground for executive talent, is calling on search firms to fill blanks left by recent defections. In September, North American beverages head Brenda C. Barnes announced her plans to resign, several months after her husband, Treasurer Randy Barnes, left. CFO Karl M. von der Heyden has said he doesn't plan to stay on much longer. The company used Ray & Berndtson to find Brenda Barnes's replacement and has hired Egon Zehnder International for the CFO search. "I think it's Roger [Enrico] now making his imprint," says PaineWebber Inc. analyst Emmanuel Goldman. Usually, he says, "it would have just been internal."

Companies are also thinking ahead with a tactic known as the presearch. The idea is to scour the market--usually secretly to avoid alarming well-regarded insiders--well before an opening occurs. Presearches result in a short list of job candidates that may or may not be contacted at a later date. Such searches might be done before settling on an internal choice, says James M. Bagley, senior vice-president for human resources at MasterCard International Inc. Some presearch candidates are men and women the recruiters already know. Others are turned up in the process.

The trend is a big moneymaker for search firms, which can get between 40% and two-thirds of their normal fee. The number of presearches done by Russell Reynolds Associates, for example, has more than doubled since 1995.

While it's hard to beat the payoff of a major CEO search--the fee for placing Robert S. Morrison at Quaker Oats is believed to have been close to $1 million--the rising search volume is pushing the recruitment business to another record year. Revenues at the top 20 firms should rise some 25%, to as high as $7 billion, the fastest growth rate in recent history, according to Executive Recruiter News. "I've never been busier in my life," says Thomas J. Neff, chairman, U.S. of SpencerStuart.

But while volume is way up, profit margins may not be for much longer. Firms are usually paid one-third of an executive's guaranteed first-year compensation, and because CEO pay has skyrocketed faster than pay for other execs, the bottom lines of firms that concentrate on corner-office assignments have nowhere to go but down as the number of CEO assignments drop. "Top-end searches are far more profitable," says Neff. Still, he says he's not as worried about profits as he is about keeping up with the work load. "If you get clogged up doing 20% more work in the middle level, of more concern than profitability is client satisfaction." Still, in a boom time like this one, that's not the worst kind of concern to have.

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