The executive search industry is just over sixty years old. In that time there has been surprisingly little innovation. For example, the standard practice is for the search firm to charge a fee equal to one-third of the placed candidate’s anticipated first-year cash remuneration. That usually works fine for relatively large companies.
However, during the technology boom that ended in 2001, some search firms began to charge one-third of the placed candidate’s first-year cash remuneration and first-year equity vesting. In 2004 my former employer Heidrick & Struggles made a profit of US$128.8m on the warrants it had received in lieu of fees for placing Eric Schmidt as CEO of a start-up called Google. Eric, Larry and Sergey also seem happy with the outcome. Google is an extreme case, but it shows what can be done
Not all companies want to issue warrants to their executive search firm. Tax is also a factor. In the UK capital gains are taxed more lightly than income. My colleagues and I have been experimenting with charging a cash fee and reinvesting up to half of it in equity. We have done this when recruiting a finance director for a private company and a chief executive for a public one. The results so far are very encouraging, so we are keen to do more of it.
There’s lots of doom and gloom in the press about the European economy, and Britain in particular. However, I keep meeting entrepreneurs who are doing exciting things. It’s great fun to work with them and help to make it happen.