As salary levels stabilize following major growth trends, private equity firms are faced with a conundrum: How can they attract high-quality executive talent to their portfolio companies when the expected pay raises might not be there? Fortunately, top talent often seeks more than just salary numbers. To develop a successful executive talent strategy, below are a few key things to keep in mind.
Current Compensation Trends
A PE talent strategy, like in many sectors, must consider the changing landscape of compensation. According to research from Thrive, the median OTE for executives in new roles dropped by 5.6% quarter-over-quarter in Q4 2023, marking the largest quarterly change in executive compensation since at least Q1 2020. Interestingly, however, PE was the only asset class to reverse that trend, with a median increase of 4%; in contrast, public VC companies saw an 11% decline, and series B/C companies saw a 6.3% decline.
Related data also shows that the median tenure of an executive is approximately 24 months. If that pattern holds, many high-level executives who accepted their last roles at the very peak of compensation increases are now preparing to seek new opportunities. The question becomes whether these executives will be motivated to move with compensation trending as it is today. Talent might be offered an increase of 10% or less to take a new position, considering the current salary stabilization.
It may be tempting to simply sit on the status quo, i.e., PE firms allowing their portfolio companies to retain their pre-acquisition leadership because hiring externally is too difficult or costly right now. Fortune reports that PE has, until now, been seen as the ‘winner’ versus public companies in the competition for top talent. A new CEO is brought in by 75% of PE-owned companies after acquisition, and 75% of those new CEOs are hired externally, according to a 2022 study by researchers from the business schools of Harvard University, the University of Chicago, and Georgetown University.
That same research found that companies that hired external CEOs in their first year outperformed the companies that did not by 27% in terms of equity value increase. It’s clear that external executive hiring significantly impacts value creation, but the question remains: How can you attract them, even with salary stabilization?
Attracting Top Talent Today
In general, private equity is sitting on a lot of ‘dry powder’ – money to invest in the best interests of increasing the value of their portfolio companies. When recruiting executive talent, PE firms are looking for people who will commit for four to eight years, or at least enough time for a level of operational improvement that’s adequate to create a sale with significant gains.
When crafting a talent strategy, it’s important to remember that salary is part of the equation but not the whole. PE firms may be able to balance out lower-than-ideal salary budgets with other appealing factors. Fortune highlights a few of the most relevant factors you may wish to emphasize, especially when convincing would-be public company executives to move into a PE portfolio company:
- PE portfolio companies have just one shareholder to be accountable to – the PE firm – rather than many. That means less time spent trying to balance competing interests.
- Executives at portfolio companies are likely to have fewer distractions from core business. There are no earnings calls to manage, shareholder pressures to juggle, and so on.
- PE firms generally advocate for a clear strategy from day one, meaning executives can get right to work. PE firms also tend to come with more resources and the means to raise money to achieve their strategic goals.
- Perhaps most appealing of all, PE-owned portfolio companies offer greater opportunities for significant payouts at a pre-planned, clear endpoint.
It’s also worth considering broader trends regarding executive development and upward movement. Middle Market Growth notes a trend in hiring at PE firms that is highly relevant for hiring at portfolio companies, too, as follows:
“Faced with a glut of professionals at the vice president level, promotions among senior executives have all but halted. Such overcrowding, coupled with the realization that career advancement could be much further off than initially expected, is spurring some people in this group to look for opportunities outside their current organizations.”
In other words, we’re seeing a pipeline backlog of rising leaders who find their paths to the top cut-off thanks to a variety of factors. PE firms looking for new portfolio company executives can use the frustration that’s causing to their advantage. Target people with a lot of ambition and potential who are restless at their current levels and have the potential to do more.
Of course, working with an experienced recruiter like Blue Rock Search can be a big help in identifying and connecting with these promising individuals! In today’s market, it’s all about balancing the ‘number crunching’ with the other factors that entice executives to move. Focus on those who are looking for new challenges and the ability to make a mark, and you just might find the transformative and dedicated talent you need to achieve your desired value creation.
By Joshua Jones
About the Author
Joining the organization in early 2018, Joshua leads the executive search efforts for the Private Equity team. He is a recognized thought leader in the recruiting industry, quoted in the Wall Street Journal and other publications. Joshua’s 15+ years of business experience in both public and private companies, along with deep relationships within various Private Equity communities, provides clients the broad range of knowledge they need to find transformative leaders. Clients consider Joshua a trusted partner who takes the time to understand their organization and adds value beyond executive search engagements.