Russell Reynolds Associates: How Family Businesses Can Compete for Executive Talent

While the world is moving to new forms of entrepreneurship, family controlled and governed businesses (FCGB) remain a large and powerful force in the global economy. Indeed, using a broad definition of family firms, almost one-third of all companies in the S&P 500, as well as 40% of the 250 largest French and German companies, are family owned.

In spite of their reach and prominence, family firms now confront acute challenges in attracting and retaining senior executives. Indeed, many family firms seeking to enrich their leadership ranks with outsiders openly question whether they can effectively compete for top-tier talent.

In this paper, Russell Reynolds Asscociates outline the factors driving the challenges confronting family firms in the market for executive talent; in turn, they offer guidance and a framework for:

• Determining when “going external” for executive talent is the right answer for family businesses.
• Attracting (increasingly sought-after) executives to family firms.

CONFRONTING AN INCREASINGLY COMPETITIVE MARKET FOR TOP EXECUTIVE TALENT

As a growing share of FCGBs undertake thoughtful succession-planning processes, many have begun to wonder if they might be “priced out” of the market for leading CEOs. Indeed, many firms feel that the long-term incentive packages offered by both public and private equity (PE)-backed firms are putting the best performers out of reach. While these compensation schemes once were reserved for an elite cadre of executives at publicly traded companies (primarily in the U.S.), the increasing worldwide presence of private equity funds and the growing emphasis on equity-based compensation at public firms are making this phenomenon more pervasive.

This trend will not abate. Private equity funds in Europe and in North America have more than $2 trillion already invested and have $1 trillion in available funds. While these numbers appear to be small when compared with the size of family controlled and governed businesses and of the global stock market, PE-backed firms have positioned themselves as strong, aggressive competitors in the market for top executive talent.

These dynamics have created an increasingly challenging environment for family firms seeking to compete for external talent. The financial rewards offered by non-family firms will rarely be matched by family firms; and this “financial rewards gap” might appear too daunting to overcome.

That said, there are highly advantageous elements of the employment value propositions offered by family firms. To capitalize on these advantages, family firms must align their unique strengths to the specific employment preferences of (and tradeoffs considered by) top executives.

INSIDE THE MIND OF CEO-CALIBER TALENT

CEOs today are confronted with significant tradeoffs depending on the nature of the company they intend to join. While CEO-level talent must assess a wide range of factors associated with any potential employer, the major tradeoffs focus on: (a) the shareholders’ timeline vis-à-vis the execution of a strategy (shorter vs. longer) and (b) the magnitude of their individual equity association with the firm (lower vs. higher).

Timeline
While publicly traded companies are increasingly judged for their quarterly performance and private equity-owned companies often target three- to four-year exit timelines, family owned businesses traditionally have taken a longer term view of performance.

Equity association
Some of the best leaders in the world are increasingly interested in participating in the enterprise risks of the business they manage and in gaining the commensurate returns. The most significant forms of capital association tend to occur in private equity-owned companies, where returns can easily be an order of magnitude above the returns achievable in family firms.

When these tradeoffs are compared (and in the absence of risk adjustments), they commonly drive CEO-level talent toward private equity firms: a medium time frame for higher returns (Exhibit 1 illustrates these tradeoffs).

Given this dynamic, what can family businesses offer in order to attract and retain the best non-family leaders?

To read the full report, click here.