“These Days, Executive Recruiters Are More Than Boardroom Brokers” – Cover Story – Engineering News Record 12/22/03

No group in engineering and construction is probably more misunderstood, mistrusted and misused than executive recruiters. At best, they’re tolerated middlemen who deliver warm bodies for a fee. At worst, they’re unethical corporate raiders who can lay waste to an entire office or division.

Neither stereotype is entirely true, but finding and keeping top executives has never been more critical than in this era of changing markets, tighter profits and stiffer competition. Business demands are changing human resources from company joke to valued part of the strategic team. And it’s pushing more corporate leaders to turn to search firms to import the best talent into the executive suite.

In many firms, executive hiring has long been an informal thing, similar to the handshake deals among partners and clients that pepper the self-described “good ol’ boy” industry. But as companies, projects and financial stakes get larger and more complicated, finding the right candidate is not as easy as it used to be, nor is keeping good ones in place.

“The talent pool that you can find to run the big businesses in this industry is really a small group of people,” says Hugh D. Rice, chairman of FMI Corp., Denver, a construction management consultant. “It’s more socially acceptable to use recruiters now than 10 years ago.”

In its just-released annual survey of more than 1,000 contractor executives, search firm Hornberger Management Co., Wilmington, Del., reports that 69% say their firms are short on talent and 66% say they do not do enough to attract the people they need.

Search firms have long trolled the industry’s executive ranks, often unsuccessfully, as financial stability and employer loyalty kept individuals in place. But that could be changing. “All of us in the business get calls routinely,” says one top contractor executive who recently switched employers. “But every so often, things happen that make you call back.”

While some executives may use a recruiter’s interest as a bargaining chip to renegotiate a current compensation deal or assignment, more are accepting offers. “When I first started, I met resistance 90% of the time,” says Philip S. Hamilton, executive vice president of MBA Management Inc., Chantilly, Va. “Now it’s 2%.” The firm does more than 300 searches a year, 85% in engineering and construction firms.

Many industry firms still insist on growing their own management. “We place a lot of importance on people understanding our culture and values,” says Todd Kenner, executive vice president of PBSJ and a 14-year veteran. But the firm uses search firms for targeted geographic and niche market penetration.

“The best way is to groom internal candidates and give them a shot, but it doesn’t always work that way,” says Ralph Peterson, chairman and CEO of CH2M Hill Cos., Denver. The firm is paying more attention to formalized management succession and executive development, but Peterson adds, “I’d be a little concerned if every position is filled with an insider. It’s like inbreeding. It will produce odd-looking offspring.”

Competitive pressure means firms must find executives who are more than just technically capable. “You’re looking for the seller-doer,” says Diane Creel, former chairwoman of Earth Tech, Long Beach, Calif., who points to the perfect storm of skills in an executive-operations, marketing and engineering. “If you can get any two of those, that’s great,” she says. “Those people are hard to find, but you need them to be leaders in the business.”

Most recruiters in engineering and construction work exclusively in it, or nearly so. But high-end global search firms also are competing, often through connections with large corporate parents of E&C firms. The selection of a new CEO for Bovis Lend Lease in the U.S. was managed by Korn/Ferry International, Los Angeles, because the recruiter also handled a top Bovis search in London, says Mark Lampl, the managing senior director who ran both.

The firm claims 8,000 global searches in fiscal 2002. While construction is not a separate market sector for Korn/Ferry, Lampl is a former manager of industrial relations for Combustion Engineering Inc., now part of ABB. The recruiter’s minimum fee is $60,000 for a “retained search,” equating to a starting salary threshold of $180,000.

Retainer arrangements allow search firms to collect fees, even if a search does not produce an executive fit. “If we get hired, the client is married to us for the search even if they say the heck with it or change their minds,” says Lewis J. Samuels, partner in Morgan Samuels, Beverly Hills, Calif.

But managing a search is more than just shmoozing executives at industry conferences. They often require big investments of time and money from recruiters. Keeping a healthy database of resumes is the first challenge. “Research has to be strong. If not, you’ll fail,” says Samuels. There were three people in the firm’s research department five years ago. Now there are 25. The firm has $4 million invested in its research efforts and a database of more than 600,000 names.

The big challenge is going “beyond the resume to boost the likelihood of a good fit,” says Jeffrey Levy, president of Emcor Group Inc., Norwalk, Conn. Samuels admits that “half the people who talk to search firms have no intention of moving on. They just want to be stroked that day.”

Korn/Ferry’s Lampl places 250 calls for a 10-name candidate list, he says. A typical Morgan Samuels search can take up to 300 hours in staff time, but some eat up to 500 hours, says Samuels. The firm’s construction industry business generates $2 million a year in revenue, although it is only 25% of the total. “There are searches we lose money on,” he adds.

Discussions also are extending far beyond executives and bosses. “A search firm worth a darn will talk to the spouse and do its best to determine if there’s a reasonable chance the family will move,” says Samuels. Prospective hires also must get a feel for the new company culture, and that means conversations with colleagues and subordinates. One CEO candidate says he met six times with employee groups of two firms he’s interviewing with. “Firms that have handled the process the best really went out of their way to test the chemistry,” says the candidate. “But it is risky to do that.”

Executives can be suspicious of search firms, as competitive pressures in an often close-knit industry can lead to questions of ethics. “There are some unethical recruiters out there, who will place people in your firm and then take them out a year or two later,” says Creel. “Your recruiter is like your doctor, you share a lot of information with them.” One recently hired CEO cautions that potential hires have “do their own personal due diligence” and dictate the ground rules.

Search executives claim they are bound by industry mores that bar, or at least frown on, such practices. Lampl says firms on retainer are barred for one year from raiding executives from the same business unit as a completed placement. But he says “mom and pop firms” and those paid on a contingency basis may not follow those rules.

Such practices could also penalize a recruiter in a relationship-heavy business where a firm counts on and is measured by repeat work. “Clients have to choose you as well,” says Brian Smith, president of Careersmith, Newport Beach, Calif.

But recruiters say that some searches are hampered by client indecision, unrealistic expectations and not knowing “what they want to be when they grow up,” says one. “The way to make this work is to have a clear meeting of minds on the job, the expectations and the compensation,” says Rice. But PBSJ’s Kenner says “it takes time to get a feel for who individuals are and what they aspire to.”

Rapid market shifts are making some executives hot commodities. Those with Middle East expertise are in vogue for firms eyeing Iraq reconstruction work. But Samuels says that obtaining required U.S. security clearances now is more difficult, particularly for non-citizens.

Recruiters also have more company director searches, as corporate governance rules, real or perceived, require better-skilled board members. “Board work used to be just 15% of our business and an accommodation to clients,” says Samuels. “Now it’s a profit center.”

While ex-public officials are popular for E&C executive slots, transitioning can be tough. “Six months before I retired, I started to get everything ready,” says Lou Smith, who left the Naval Facilities Engineering Command in 2000 with his sights set on a high-paying private- sector E&C job. “You have to start recusing yourself from potential conflicts.”

Smith had two company offers, but chose a job as construction chief of San Diego City Schools. It was a definite culture change. The district offered a signing bonus, extra vacation and other perks, but “the first thing they did was give my contract to the newspapers,” says Smith. A performance-based bonus plan is now part of that.

In the post-Enron world, new scrutiny of compensation is growing, even in private firms. While industry observers say executive pay and bonuses took a hit in 2003 (see story p. 36), regulators are still watching how total compensation packages are developed, including signing bonuses, housing allowances, interest free loans and stock options. “Executive compensation is in a state of confusion,” says Michael Ketner, president of contractor search firm Michael L. Ketner & Associates, Pittsburgh.

But big paychecks are not the only draw. “People at high levels want autonomy, flexibility and control over their own destinies,” says PBSJ’s Kenner. The Hornberger survey found that the number of CEO and executive employment contracts are dropping. “Both parties want to remain flexible during these changing times,” says Frederick C. Hornberger, firm president.

Trying to make sense of executive search, among other workplace challenges, could elevate human resources in companies. “Executive search is a critical H.R. function,” says Steve Gilbert, human resources senior vice president at Fluor Corp., Aliso Viejo, Calif.

Hornberger says 2004 could bring a big rebound in hiring as construction economics improve and firms move to relieve stress on overworked staffs. He also sees H.R. getting more corporate respect and profit center status as firms focus on development of “human capital.” Says Hornberger: “Elevating H.R. to executive status represents a profound shift in the world of construction, but one proving necessary for the future survival of many firms.”