I love CEO searches. Each is a unique opportunity to work with a company’s Board, or owner, to assess a company’s strategic plan, map out the skills needed, and then go out into the market to hunt down the person best able to make those plans come true.

The appointment of Charlie Beck as the new chief executive of the Los Angeles Police Department has transported me back to the last time we picked a police chief and I was a Deputy Mayor.

November 2002: Our administration was grappling with an LAPD in crisis. The city was prey to soaring rates of violent crime, with our poorest neighborhoods the most victimized. After a decade bracketed by the Rodney King beating and the Rampart corruption scandal, people were starting to wonder whether the LAPD were the good guys or the bad guys. The department was being run by those the Los Angeles Times editorial board called the LAPD’s “infamously insular insiders.” Public distrust of the police was matched only by the racial politics around the selection of the next chief; both were at fever pitch.

We ultimately concluded that we needed to bring in a hard-charging outsider who could bring a fresh approach and desperately-needed reform. Our pick was former New York Police Commissioner Bill Bratton.

November 2009: With Chief Bratton’s resignation to join a private security company, current Mayor Antonio Villaraigosa faced a police chief search of his own. Chief Bratton had pushed crime rates to historic lows, introduced sophisticated data-driven policing principles, and dramatically improved community relations.

Mayor Villaraigosa chose Charlie Beck, a 32-year veteran of the LAPD on whose behalf Bratton had vigorously lobbied. Given how closely Chief Beck is identified with his former boss, he has surprised many by outlining a new model of leadership. In his words:

The only way that real change is made is from the bottom up. You can mandate change from the top… but the only way an organization really changes is from the roots up; that’s much more powerful. So what you’ll see is different with me is I’m going to concentrate on the roots of the organization.

Whereas “Mr. & Mrs. Bratton” have been fixtures on the Hollywood circuit (see Mrs. Bratton’s official website here), Chief Beck says:

I think I have a little more of a common touch, much more of a common touch. I think that maybe at the end of the day you’ll think of me more of a cop’s chief rather than a leader-manager.

Chief Beck even jokes about Chief Bratton’s extensive travels to faraway places for conferences, speaking engagements and the like:

I certainly won’t travel as much as [Bratton] did. This is my home. This is where my family is. . . . I’m a local boy, I always have been and that’s the way I’ll be as chief. And, again, with my philosophy of driving these changes down internally, I’ve got to be here to do that. I’ve got to touch people. I’ve got to have conversations with the [officers] and I can’t do that from out of state…

Chief Beck is the kind of guy you could have a beer with. Whereas Chief Bratton will take his Champagne Krug chilled at 38 degrees, thank you.

As I reflect on the week’s news, two things come to mind:

• When conducting a search, resist the urge to look for a carbon copy of the old guy. LAPD now is a dramatically different place than it was in 2002, and this CEO search was an opportunity to find a new chief to take the department to its next phase of growth. Mayor Villaraigosa was smart to focus on the challenges in front of the department now, and to focus on finding the person to lead the department out of the Bratton era. A CEO search should not just answer the question “What does this company need?” but “What does this company need right now?”
• As you move up the food chain, don’t lose touch with the little guys. I’ve been inspired by Chief Beck’s emotional connection with his troops. It’s rare to find a leader who maintains a common touch as he or she has risen through the ranks. Most leaders lose their empathy as they move up the corporate food chain. According to a recent study:

People in power are prone to dismiss or, at the very least, misunderstand the viewpoints of those who lack authority… Power can inhibit empathy, the ability to perceive another person’s emotional states.

Since the Mayor is an elected position, there’s no civic CEO search more important to Los Angeles than that of police chief. I’ve not been privy to the discussions around the selection of Chief Beck, but given the goal that both the Mayor and Chief have laid out – to continue the ambitious agenda defined by Chief Bratton and push it through the ranks – Chief Beck’s deep roots within the department will serve our city well.

While Chief Bratton has been lauded for his brilliance at defining a new path for the LAPD, Chief Beck looks like a fine choice to shepherd the department into the next decade.

Congratulations to Mayor Villaraigosa and Chief Beck. You have all our best wishes and support.

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Hat tip to strategy consultant Dave Brock for the link on leaders and empathy.

Lots of talk this week on executive compensation, with fascinating trajectories for American culture, business, society and public policy. I followed the debate so you don’t have to.

As you might expect, much of the conventional wisdom has focused on a potential Wall Street brain drain should comp restrictions be put into place (examples here, here and here).

The week’s best commentaries came from The Economist and compensation expert Frank Glassner.

First, The Economist points to big investment bank bonuses and introduces the concept of “employee capture:”

Such rewards, in the face of public protest, feed the impression that banks are victims of what some call “employee capture”. The top ten investment banks at the start of 2008 made an average return on equity of just 8% between 1999 and 2008. Four made cumulative losses. Staff got four times as much as shareholders did in profits. In 2008 Merrill Lynch paid cash to staff equivalent to over 100% of the capital left by the year-end.

Normally, this would be just a problem for shareholders. But because the public had to get involved, it’s now everyone’s problem. Next, the newspaper debunks the banks’ revisionist protests that, because they’ve repaid public subsidies, their bonuses should revert back to those of 2007. Fact is, they continue to operate on public support:

It is not just that they were saved from destruction. They got public capital (much of it now repaid), short-selling bans on their shares and rescues of counterparties, such as American International Group, which the public otherwise had no interest in saving. Today they enjoy laxer accounting, loose collateral rules at central banks, explicit debt guarantees and asset-purchasing schemes. And, critically, they can borrow cheaply because they are deemed too big to fail. All of them-from comparatively healthy Goldman to the nationalised weaklings-are being subsidised by the rest of us. As a way to keep cash flowing to the wider economy and help banks rebuild their capital, this subsidy made sense; nobody intended it to go to employees.

The heads-I-win-tails-you-lose aspect of all this has got America steamed. But The Economist argues that the answer is not simply to tax the banks’ highest earners:

In the longer term the bonus mess underlines the importance of getting the state out of finance: setting a time limit for the explicit guarantees and finding ways to lessen the implicit promise of support through living wills and the like…. Retrospective taxes are usually bad news. They distort incentives, and scare investors in other industries who fear they may be next. A wholesale cap on pay would lead regulators further into the swamp of micromanagement. And symbolic caps on a few top executives, as the White House is threatening, are too feeble a response.

The resident expert on pay on CNN, Bloomberg, and elsewhere is Frank Glassner, who’s been omnipresent this week on TV, newspapers and across the blogosphere. Frank is CEO of Veritas, the top pay consulting firm to Fortune 1000 companies. Because our firms share clients in common, I’m on his private email list. Frank this week sent his clients a manifesto advising that when it comes to pay, it shouldn’t be a matter of “how much,” but “how.” I sought his permission and bring that note to you here. An excerpt:

[G]overnment regulation will probably have unintended consequences, without curbing excessive pay. For example, if the maximum ratio of CEO pay to worker pay were mandated, companies would likely respond by outsourcing the work of the lowest paid workers, rather than curbing CEO pay.

For the rest of us who are not recipients of public largesse, the lesson we can take away is the delicacy with which we should approach compensation, and how it needs to be situated within a broader human capital strategy. Company directors will be under greater scrutiny than ever. Says Frank:

[C]ompanies should design compensation packages to attract the right people for implementing the company’s strategy. For instance, below market salaries coupled with aggressive incentive pay linked to individual performance is likely to attract self-motivated entrepreneurial individuals, however, that very type of pay strategy may create increased risk taking as well, and would need to be designed with appropriate checks, balances and controls.

Companies also need to assure their executives longer tenure and horizons – without the necessity of pay guarantees. A CEO who is afraid of being fired for not making short-term financials will not focus on the long term. A board that is actively engaged in strategy formulation and implementation and compensates a CEO for strategy implementation milestones, along with monitoring long-term performance, is more likely to understand, appreciate, and encourage a CEO’s efforts, even if they yield short-term financial results that are below expectations. Thus there is an urgent need for boards to evaluate their executives’ performance annually to determine their progress on long-term goals.

What I like most about Frank’s note is the premise that when it comes to compensation, one size does not fit all. When business strategies differ between companies, their compensation strategies ought to differ as well.

Companies should have the fortitude to set their compensation strategies according to their corporate strategies, not simply based on external markets for pay, and not simply based on internal ideals of what’s “fair.” To accomplish this, you’ll need first to identify how pivotal to your company strategy an executive really is.  For my earlier post on how to do that, click  here.

***

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The Skinny on Executive Pay @JoyofHC.

• What jobs are companies upgrading?
• What jobs should I consider upgrading?”

These are the two most common questions people have been asking me following my last blog post “Behind the Layoff Numbers, Companies are Upgrading Their Talent.”

The answer in both cases: jobs that require “pivotal talent.” “Pivotal” is not synonymous with “important.” Pivotal talents are those game-changing employees whose performance can make or break the bottom line.

Two of the best thinkers on this subject are John Boudreau and Pete Ramstad, whose book, Beyond HR: The New Science of Human Capital, has helped shape my thinking on how to connect business strategy to human capital strategy.

In a workshop I once attended, John and Pete offered a fictitious case study involving FedEx and pivotal talent. The board of FedEx pronounces Asia as their #1 growth market and key to the company’s future. Many companies make such pronouncements, and then fail to put in the people they need to succeed there. FedEx next analyzes their Asia growth processes, identifying the most important bottlenecks to that growth. (You may recall from business school that a “bottleneck” is a key constraint which, if removed, causes the entire process to work better.) A major bottleneck is the periodic assigning of landing rights at key airports in the region. By securing those landing rights, FedEx could grow in Asia; without those landing rights, growth of the entire enterprise would be compromised.

FedEx realizes that the people who secure those landing rights are pivotal to the future growth not only at those airports, but of the enterprise as a whole. Those community liaisons are pivotal talents.

How much compensation should FedEx pay to recruit and lock up the few individuals in each market with the knowledge, skills and connections to secure those landing rights? Further, what if they could poach those individuals from DHL or UPS and not only secure their competitive advantage for years to come, but also neutralize their competition?

This chart demonstrates the talent pool of pilots versus community liaisons:

Pilots are unquestionably important to the business of FedEx. Assuming the pilots have a basic level of competence, though, improving pilot quality yields little additional value. But at key airports where landing rights are at stake, the difference in value to FedEx between the worst and best community liaisons is huge.

Who are the FedEx community liaisons at your company?

Before reflexively deploying traditional strategies like across-the-board layoffs and pay cuts, evaluate your approach to “pivotal talent,” those game-changing employees whose performance can make or break the bottom line. As market conditions evolve and business objectives quickly change, you’ll need the right blend of critical skills to succeed. Focusing on your pivotal talent can provide you a major competitive advantage over the next 18-24 months.

Consider:

• What processes does your company need to win in your marketplace? Which are potentially pivotal? What are the key bottlenecks?
• At those pivot points, which are the jobs where performance quality will determine success?
• Do you have the people you need in those pivotal jobs?

If not, now is the time to upgrade. The job market, while brutal for job-seekers, has never been better for employers. You can access talent now that will set up your company for years. If you’d like to discuss whether Chen Partners can help ensure that you get the right talent in those pivotal roles, shoot me an email.

If you do have the right pivotal talent, invest in them now. Wrap your arms around them. Lock them up with incentives. Focus on their development. Otherwise, the next call they take could be mine.

Companies everywhere are trying to reinvent themselves for a future they could not have imagined a year ago. Problem is, their human capital practices are not keeping up with their shifts in strategy.

I was out drinking with a senior partner at a well-known global consulting firm. He was leading a campus-recruiting project to hire students from China as they graduated from American universities. After all, it’s the era of the global consumer, and 53% of executives say that China and India will be vital to their success in the next five years. This project sounded like a good way for his firm to stay ahead of their clients’ needs.

He and his team had just been to UCLA. I asked how things went. Not well, he replied. Now I happen to know that UCLA is commonly called the “University of Caucasians Living Among Asians,” so I wondered why all those Chinese students didn’t fit the bill.

He said that they were uniformly smart and ambitious, but lacked “cultural fit.” In fact, he complained, one student came into the interview in a pastel suit, his hair in a pompadour. Elvis on top, Miami Vice below.

Research shows that, as a matter of human nature, when we meet someone, we size him up within five minutes, and then that initial impression colors not only our entire meeting, but also our recollection of that meeting. In recruiting, we call it the “Halos and Horns Effect.”

A Brooks Brothers model would have had a better chance getting past those crucial first minutes with my friend’s firm.

But this begs the question: What culture is this firm is recruiting to?

The Chinese students at UCLA now are China’s brightest, richest, most connected, best English-speaking, young people. For a firm that has tied its future to winning and executing China business, these candidates could be exceptionally well-equipped to helping the firm execute on those strategies.

It’s in the boardroom that companies announce new strategies and organizational structures, but it’s on the frontlines of people-management that the rubber meets the road.  Companies should routinely review their human capital practices to ensure they’re aligned with their strategies.

Otherwise, that Elvis lookalike who gets away could be the one who walks across the street to help your competitor eat your shorts.

Former Los Angeles Mayor Dick Riordan used to say, “You don’t have to get serious about business until you turn 40.”

Well this weekend, I turn 40, so watch out.  If this week is any indication, this recession will continue to power continued growth at Chen Partners. This week, we completed a VP Sales search at a portfolio company of a private-equity client who bought the company intending to create value by upgrading its sales function. And, at another company, the CEO signed us up to find a strategic new VP Human Resources to replace an administrative type.

That our firm is growing in this recession comes as a surprise to many. That’s because of all the news headlines blaring these half-truths:

1. It’s a brutal job market out there.
2. The recruiting industry is getting decimated.

Certainly, the recession is radically reshaping how companies are hiring. But here’s the whole truth:

1. It’s a brutal job market out there IF you’re a job-seeker. But for employers, the market has never been better.

Hidden in all the layoff reports is the fact that companies have been taking advantage of the chance to dismiss the low-performers and cherry-picking from the many good people out there. But the expanded talent pool means that there’s more work involved to find the best.

If you’re hiring, take care to avoid these seven common hiring pitfalls. In the future, I’ll blog more on how to recruit the best. Meanwhile if you like, click on “recruitment process” in the tag cloud at right.

2.  The retained-search recruiting firms are in trouble. That’s because the total recruiting pie has shrunk, and with their remaining recruiting dollars, companies are reevaluating longterm vendor relationships in search of results and efficiency.

It is indeed true that the retained search industry has shriveled in this recession. My old firm, global executive search firm Heidrick & Struggles, was trading at $52 in July 07, and is now at $18, a 65% decline versus a 33% decline in the Dow in the same period. The other publicly-traded retained search firm, Korn/Ferry, has similarly shrunk. But the decline in the industry has a lot to do with the retained search business model. Retained-search firms collect their fee up front, regardless of whether or not they ultimately deliver a viable candidate. The industry’s average completion rate is only 60%, and search firms do not return fees for uncompleted searches.

The retained-fee structure creates a conflict of interest between clients and shareholders, since revenues come from selling new searches, but the resources to work on those searches are booked as costs. That these firms are publicly-traded creates inexorable pressure to continually increase revenue by selling more searches, while at the same time reduce expenses by cutting the resources needed to complete those searches.

The retained-search business model has remained unchanged since the search industry was created in the 1950s. And, as the shareholder value destruction in this industry attests, the model is increasingly out of step with the increased transparency and value demanded by companies in this recession.

Two years ago, we established our firm with the intent to align our success with the building of our clients’ businesses. We accept only those assignments we feel confident we can complete. Then we dedicate the resources to complete each one.  We strive for excellence in all our work. And we back up our pledge with a pay-for-performance fee structure.

This recession has brought wrenching change for all businesses, but surviving companies will see lasting benefits. First, having cut to the bone and backfilled some of those cuts with better talent, they are leaner and more focused. Second, having reevaluated all their expenses, they are driving for greater efficiency and effectiveness in their recruiting value chain. Both these trends will continue to fuel the expansion of our work.

I’ll honor Mayor Riordan’s advice about turning 40 with a renewed commitment to helping our clients take advantage of this recession by priming their companies for renewed growth.

To all our clients, thank you for your trust and partnership. It’s by helping you build your businesses that we grow ours.

Next time you make a hire, do not rely solely on the interview process. Research shows that what we know about ourselves is fairly limited, with many of our impulses, traits and beliefs residing in our subconscious. See photo.

The current recession only further increases the business risks of each new hire. To reduce those risks, conduct good reference checks, since reference checks are the only way to verify what a candidate is really like. Do not ask the most commonly asked reference question: “Tell me about Laura’s strengths and weaknesses.” It prompts bland generalizations, and leads nowhere.

Here’s how to make reference checks count:

1.  Create a roadmap. The goal of referencing isn’t to dig dirt, or to get gossip, but to verify a candidate’s fit for the position.  Identify the specific skills, competencies and personal characteristics required for the position, and reference against those.

2.  Focus on references from the past five years. People grow. Studies show that the best predictor of future behavior is immediate past behavior.

3.  Conduct 360° references.  Don’t just speak with former bosses. If the candidate you are considering has already had some career success, she’s already shown some skill in managing upwards. Often, the most revealing references are provided by direct reports and peers.

4.  Always go off-list. Inform the candidate that it’s your policy to identify and call people not on her list, and ask if she has any concerns with that. If yes, those concerns can be revealing. When speaking with her references, always ask if there are others who might have different perspectives on what it was like to work with her. Then call them.

5.  Take control of each call. Avoid wasting anyone’s time. Start each call knowing exactly what you’re after on that call.  Could be one thing, or four, based on your referencing roadmap, and when and in what capacity this referee knows your candidate. Perhaps you have a question around a candidate’s departure from a certain job, or how well he manages his peers. If the conversation veers off-topic, promptly steer it right back to your agenda.

6.  Get specific examples, then drill down. Don’t ask present-tense questions: “How does she…” Rather, get specific examples from the past: “Can you remember a time when Susan actively mentored a member of her team?” When you hear generalizations, get examples. For each example given, drill down to find out the original Situation, what Actions she took, and the Result of each example. S-A-R.

7. Identify developmental areas. One of my favorite questions, at the end, is: “If you were his executive coach, what would you have him working on in the next three years?” More effective than asking for the candidate’s weaknesses, and opens the door to further probing.

8. Hit Pause. If the reference ever hesitates, wait. People do not like breaks in conversation. By pausing, you’ll often get the most revealing insights.

9.  Take notes. Research shows that memories of conversations always are faulty, and are colored by one’s own opinions of the candidate. I always tap along on my computer, taking near-verbatim notes. When I review and type them up, I always see things I forgot were said. Try to take down nearly everything that’s said on your call, so you can later assemble your notes from all the calls to get a more rounded view of your candidate.

Five or six reference checks like this, lasting 45-60 minutes each, and you’re done. Yes, that’s a serious investment of time, but it pales in comparison to the cost of a wrong hire. And, if all works out, you’ll gain excellent insights for onboarding your newest hire.

Was this helpful? What are your experiences with referencing? Let me know if you have questions I should address in future posts.