July 19, 1999 5:00 AM PDT

HP, Compaq face extraordinary CEO searches

Hewlett-Packard is facing unprecedented conditions in searching for a new chief executive, created by a CEO market tighter than any in memory.

"At the top 20 technology-based companies, every No. 2, 3, 4, and 5 person has been approached," according to J. Richard, head of J. Richard & Company, a consulting firm that specializes in determining executive pay. The new HP chief executive can expect annual pay as high as $25 million, he said.

Compaq's search is hardly much easier.

CEOs are scarce because of a cheery economy and the allure of e-commerce start-up companies. Consequently, high-tech companies like HP and Compaq must dig deep to fill vacancies at the top of the corporate ladder, according to several headhunter firms.

"It's clearly a seller's market," said Jeff Christian, chief executive of search firm Christian and Timbers and a leader in HP's hunt to replace outgoing CEO Lew Platt. "In general, it's a difficult time to do CEO assignments. You need to work harder on them, talk to more people, be more persistent."

The stakes are high for both companies. HP needs someone who can fulfill the promise of HP's Internet-oriented "e-services" initiative, which has driven HP stock to record highs on an almost daily basis for several weeks. Compaq needs someone who can turn around the faltering company, which has struggled both to sustain its traditional PC business as well as integrate its high-end hardware it inherited from acquiring Digital and Tandem.

HP's search for a new CEO formally began in March, when Platt announced he would step down after a long transition period and that the company would be split in two. Compaq's former CEO, Eckhard Pfeiffer, was ousted in April after reporting bad quarterly earnings.

One reason for the sluggish pace of hiring a new CEO at Compaq and HP is that candidates likely are leery about how much power the companies' boards of directors possess, Richard said. "Any seasoned CEO will say, 'If I go into any one of these two situations I could be overcontrolled and micromanaged,'" Richard said.

Christian declined to comment on details of the HP search, other than saying it's going well and that HP's prominent place in the high-tech landscape has helped to gain access to every person being considered. "It's a fun search, being able to cast a very wide net of the most senior people in the industry," Christian said. "We've been extremely successful in getting to people we want to talk to."

On the other hand, "Of those who are top executives in technology [companies], who have the capability of being CEO of a $40 billion industry, it's not a huge number," Christian said. HP has focused its search on people from technology companies who understand the computer industry, he said.

Although the CEO market is tight, HP is at an advantage because it's in a good position. "It's unique to have a CEO search for a company doing as well as HP," Christian said.

Richard doesn't see HP's transition as much more orderly than Compaq's, however. "Neither of those companies was able to promote from within," he said. "That a company that size [HP] wasn't grooming two or three people for that job--it really blows me away."

HP has begun to consider candidates from overseas, Richard added, but he still believes the top pick is Ann Livermore, the company's current head of its corporate computer division. "There's an extreme level of confidence that she can pull it off," he said.

Start-ups sapping talent
Not only are there a diminishing number of people who are available to fill top executive posts, but many of them are drawn to new start-up companies, according to Peter Felix, president of the Association of Executive Search Consultants. At a start-up, executives have control, a chance at striking it rich, and excitement, he said.

"It's a great shot in the arm to start something new. That can be a lot more attractive than running 100,000 people at IBM," Felix said. "In competing for talent, these baby companies are proving as effective if not more effective than traditional highly successful corporations."

Other reason for the CEO shortage is that many are taking jobs at venture capital firms, Richard said. That's ironic, given that it's these same venture capitalists who often are the ones who look for CEOs to take the helm of the start-ups in which they've invested.

Christian, whose firm is working on at least 50 CEO searches right now, said that part of his job is getting the client to focus on a candidate's potential instead of just his track record. "You need to be more creative," he said.

Dictating terms
As a result, prospective CEOs are bargaining from a position of strength, making them better able to dictate terms such as pay and control over their company.

New CEOs can expect sizable pay, stock option gains, perks, and a bonus each year.

"I would start my thinking at about 10 million bucks a year, and I'd move closer to 20 or 25 for the right person with a track record of managing a very major enterprise," Richard said. Of Compaq, which isn't in as good a position as HP, "I'd probably be thinking 60 or 65 percent of that," he said.

Pay today is driven by the example of start-ups whose stock prices have soared, Richard added. HP might be able to offer $25 million or $50 million in stock options, but many executives watching Internet stock prices leap now are thinking more in the range of $500 million.

"The people in the 35 to 50 [age] group who can show CEO experience, I won't say they can name their price, but they are very, very attractive," added Felix.

Prospective CEOs today also are able negotiate control over their companies' boards of directors, Richard said. "You have to give the CEO coming in the opportunity to have his or her board changed along with him or her," he said.

Compaq vs. HP
Christian said that HP and Compaq have similarities in terms of the product they sell, but their CEO searches are different.

Compaq is a "tough turnaround"--an opportunity for a person to distinguish himself for rescuing a troubled company. In addition, Compaq has "a lot more building to do in their management team" since many executives have left the company, he added.

Though he hasn't run into any problems looking for an HP CEO at the same time others are looking for a Compaq CEO, "I think I'm talking to some of the same people," Christian said.

One liability of Compaq is that it's in Houston, Texas, whereas HP is in Palo Alto, California, right next to the high-tech hub of Silicon Valley, Christian and Richard said. "I'd rather recruit someone to at least a dozen places than I would to Houston," Richard said. "Who are you going to rub elbows with in Houston?"

A lucrative business
When it's a good time to be a CEO looking for a new job, it's also a good time to be a headhunter firm.

Search firms typically take a fee that amounts to one-third of the executive's first year of annual cash compensation--pay and bonuses--Richard said. And if it's a difficult placement, that fee can run up to 35 or even 40 percent. Not only that, but expenses are covered by the company in need of the executive.

One issue that has arisen with tight CEO market is that executive search firms might not be able to approach executives they've already placed.

"I believe anybody you've placed for a fee you should not go after for any period of time," Richard said. "If you've collected a quarter million bucks, you don't pull him back and make some more money. I don't think that's ethical at all."

Therefore, a successful search firm such as Korn/Ferry International might not be able to approach many a lot of companies with strong candidates. "Of the Fortune 500, they probably can't touch 200 of them at least," Richard said.

For that reason, companies like HP will often hire more than one search firm, including one with a relatively small market share, Richard said.

Battling for talent
"If you track appointments of CEOs, the great majority--I'd guess over 75 percent--are people who have not been corporate CEOs before. That tells you something. You've got a huge shortage," Richard said.

It's a reversal from the situation a decade ago, when executives and managers were losing jobs as a result of corporate "rightsizing, downsizing, and re-engineering," Felix said.

"Then, it was the other way around. There was an oversupply and an underdemand," Felix said. "A lot of them felt they'd been dumped. Now we've passed that phase."

"We're in a war for talent right now," Felix said. "It's probably as dynamic a market for executive talent as anyone can remember."

 

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