Selker Leadership

The recent fervor over the competing proposals from the White House and Congress to cap executive pay for firms who have received TARP assistance has everyone from Carly Forina to Donald Trump weighing in on whether or not this is a good idea. And while it appears the exact details of how compensation will be capped still need to be worked out in negotiations between the administration, Congress and the firms who have received money, on the surface I can say that there is a direct correlation between how executive compensation is structured, and a firm’s (and industry’s) ability to attract and retain their talent base.

As a career executive search professional with over 20 years of experience, I know that there are three main reasons why people ultimately accept or decline a job:

1. The Opportunity Quotient, meaning, the inherent challenge, the ability to have fun, impact a situation, have greater responsibility and work with great people are all compelling reasons to move forward.
2. The Compensation Package, both short-term and long-term allows greater wealth creation and accumulation.
3. There are Personal Reasons that come into play and force one’s decision either to accept or decline an offer. These could be life changing and unforeseen circumstances such as a family illness or a divorce that either does not allow relocation to a new geography, or forces geographic relocation.

Here’s the rules:

 1. The Opportunity Quotient needs to always be a factor. Even if the Compensation Package is astronomical, if the Opportunity Quotient is not there to some degree, a new executive won’t be long in the job.

And no matter how good the Opportunity Quotient is, if the Compensation Package is less than the executive’s current comp, they won’t be coming to your company. This will always be the case except if:

•  The executive has already acquired significant wealth, and the Opportunity Quotient is significant. Then the executive may accept an offer of employment even without a better Compensation Package. (I placed a CEO at an exciting technology company who took a $750,000 a year pay cut and put $1 million of his own money into the company to acquire an additional 10% equity stake. In this case, the executive saw that the long-term wealth creation opportunity outweighed the short-term compensation loss.)

2. People very rarely accept an offer of employment at a lower base salary than they currently have. This will always be the case except if:

• On a comparative basis the long-term wealth creation potential in the new opportunity is far greater than the difference in their new to current base salary.

3. In nearly all cases with most people, Personal Reasons trump everything and either force someone to not accept an offer regardless of how good the Opportunity Quotient or Compensation Package is; or accept an offer even if there isn’t a great Opportunity Quotient or Compensation Package.

Given this, what can we surmise about the compensation caps under consideration for those companies accessing TARP funds?

If $500,000 base salaries for executives are significantly below the median point in the industry, unless the long-term wealth creation opportunities are significantly better, it will be extremely difficult to attract and retain top talent.

Given the mandate that no restricted stock granted can be sold until all loans are paid back to the U.S. Government, unless the potential long-term wealth creation opportunity is better than what can be achieved at a company who has not taken TARP funds, it will be extremely difficult to attract and retain top talent.

Given these factors, on the surface I would conclude that the best bet to attract and retain top executives into these troubled firms is to attract new executives who:

• Look at turning around a high-profile player under intense scrutiny in the financial services sector as a “once in a lifetime” opportunity to transform a company an industry, and help right the U.S.A.’s and the world’s overall financial health and viability; and,
•  Have already achieved a sustained level of wealth creation in their lives; or,
• The executive is a “next step” candidate, e.g. the operations, revenue and/or role are all slightly larger than the executive’s current or past operations, revenue and role; and because of this, the Opportunity Quotient is highly attractive.

Come to think of it, given how badly our current crop of past and recently successful financial executives (measured by how much they’ve been paid) have so totally screwed things up, with their short-term thinking around profits and wealth creation which lined their own pockets, and led to the incredibly bad decisions and actions around risk mitigation that have resulted in the myriad toxic assets on their books, maybe going downstream to the “next step” candidates to lead our beleaguered financial firms isn’t such a bad idea after all!