April 20, 2023

TPL Insights #167 – Dramatically Improve Your ROI on Every Executive Hire You Make This Year

By Rob Andrews

 

By Rob Andrews

In the age of heightened awareness of ROI on talent, an often-overlooked metric is executive search placement retention. Global stick rates among executive placements are dismal, and the statistics have been consistent for forty years. Almost one in every two executive hires goes bad within two years. That is roughly 45% failure, at a cost that is incalculable.

According to a Chief Executive magazine article titled “What Causes CEO Failure,” “Up to a third of Fortune 500 CEOs have lasted three years with top executive failure rates as high as 75 percent and rarely less than 30 percent.” One major search firm CEO, Kevin Kelly of Heidrick & Struggles, completed a study of 20,000 of his firm’s own placements. Kelly summarizes his findings: “We’ve found that 40 percent of executives hired at the senior level are pushed out, fail or quit within 18 months. It’s expensive in terms of lost revenue. It’s expensive in terms of the individual’s hiring. It’s damaging to morale.”

In another study completed by Harvard Business Review and cited in “Ending the CEO Succession Crisis” by Ram Charan, “[T]wo out of every five new CEOs fail in the first 18 months.” Further research shows the same pattern globally. CEOs and senior executives are routinely hired based on their drive, IQ, and resume. They’re fired for lack of emotional intelligence, poor people decisions, poor financial performance, and being totally out of touch with their workforces and customers.

The way I see it, the executive hiring process typically operates like dating and marriage, with very similar results. Just like dating, we usually start out with a woefully inadequate description of precisely who we are, what we are trying to accomplish, and who we need to get there. World-famous board advisor Ram Charan states that there are four things successful boards do when selecting CEOS that unsuccessful boards do not. First and second, they get crystal clear about culture fit and performance expectations. Third and fourth, they are flexible about where they come from and allow for imperfections.

Hiring authorities usually rely on simple job descriptions and resumes and fail to define critical success factors in advance. Without a clear focus on what matters, the selection process becomes a beauty pageant and a chemistry contest. They hire a new executive because “it feels right”; he or she looks good, sounds good, smells good, and is, oh, so impressive. Then, in three to six months, they start to have that queasy feeling in their stomach which signals they might have made a mistake and things are just not working out. Roughly 50 percent of the time, they know they’ve made a mistake within eighteen months.

Facilitating a match that will truly work and last should be the primary goal of every executive search. We exist for the purpose of enhancing lives and effectiveness through our human capital consulting efforts. We help our clients achieve their business objectives.  Our search consultants’ passion is facilitating matches that work for both the client and the candidate. We are deliberate in our approach.

In pursuit of a process that is predictable and minimizes executive hiring failure, I have studied over 5,000 failed executive placements and determined the reason(s) for each failure. Almost 50% of the failures I have examined can be tied to cultural misalignment, and almost 50% can be tied to poor performance. Again, these two factors are rarely addressed in the position or job description. While no process involving human beings can ever be perfect, our consultants seem to have broken the code when it comes to avoiding the most common hiring mistakes, and we are happy to share what we’ve learned.

First, MAKE NO ASSUMPTIONS. Every senior-level search should start with a clean, blank sheet of paper. Relying on the byproducts of recently conducted similar searches to present yet another list of the usual suspects is a practice which should be avoided at all costs. Remember that the “business as usual” approach to senior executive hiring leaves much to be desired.

“Business as usual” questions when selecting search firms include:

  1. How many searches have you done in this industry?
  2. How many similar searches have you done during the last twelve months?
  3. What does your network look like in our industry?
  4. How many CEO searches have you conducted in our industry?

Here is a far more effective set of questions to ask:

  1. What is your successful delivery rate?
  2. Do you track your performance and/or retention rate?
  3. Do you conduct primary research, or do you depend primarily on databases and networks?
  4. What does your needs analysis process look like, and what key discovery items are you seeking?
  5. How many personal contacts will be made, and who will make them?
  6. How many of my competitors are off-limits to you due to hands-off restrictions?
  7. Against what kinds of analyses or metrics will you measure potential candidates?
  8. Will you require candidates to complete a self-appraisal?
  9. How will you determine cultural fit and the candidates’ ability to do the job?
  10. Will you conduct 360-degree reference audits prior to final interviews and offers?
  11. Are you flexible and focused on me as well as willing to customize my search?
  12. Will you assist me in the successful integration of the newly hired executive?

I have thrown a lot of stuff at you to get you thinking. The failure rate among newly placed executives is alarming, and, unfortunately, it is getting worse. Every time one of these misfires occurs, bad things happen. The most obvious and most discussed is the loss of financial performance at the client site. Somewhat less obvious is the disruption and/or loss of momentum within the client organization. The total cost of mis-hires and/or mis-promotions has been estimated (depending on which study you read) to be somewhere between 5 to 10 times the executive‘s annual compensation. Based on my real-world experiences, I believe the cost to be substantially greater.

We believe retained search should be practiced as it was intended: a specialized form of management consulting, not a transactional exercise of filling seats in a vacuum. Leadership engagements should be delivered with sustainability in mind, rather than selling off-the-shelf products or cookie-cutter solutions that don’t solve the client’s problem. As such, we at Allen Austin commit to the following outcomes:

  1. Presentation of fully vetted finalist candidates 35 business days after you approve our search specification, search strategy and candidate assessments and vetting instruments.
  2. An industry best 92% placement retention rate at the 2-year mark & a 97% offer acceptance ratio, compared to the overall results for retained search of 55% & 70% respectively.
  3. Flawless execution of our proprietary Foresight™ search process, which is specifically designed to address the high rate of failed executive placements globally.
  4. Leveraging our 29 year-long study of over 5,000 failed placements, almost half of which failed because of two things: unclear performance expectations & poor cultural fit, or both.
  5. Collaboration around a comprehensive Needs Analysis in which we engage stakeholders to define the culture, goals, scope, and specific performance expectations on the incoming executive.
  6. Based on the results of the Needs Analysis, we develop a detailed search specification, search strategy, roadmap, bespoke assessments, vetting instruments, and timeline.
  7. Consistent application of our proprietary tools: 4Cs candidate assessment, ForesightTM 360-degree reference audits, and background checks to screen out candidates who are not a fit, from a cultural and performance perspective.
  8. A full two-year guarantee on all searches with a total first year cash compensation of $250,000 or more, compared to the industry average of 6 months or 1 year.
  9. Innovation in an industry that hasn’t changed in over 100 years. Our 29-year-old battle tested Foresight process is the most effective process of which we are aware. Our track record, performance metrics and references corroborate our assertion.

We sincerely hope this piece has been helpful to you. For complementary resources on ways to dramatically improve your retention, sign up for our blog and explore our website for additional tools.

Warmest Regards,

Rob