Hiring Senior Talent – Part II

In my last post, I asked "are you ready to make your next senior hire?" and promised some tips on how to land great people.

In the mid-1990's, PeopleSoft was on fire. Our stock price was rising, our culture was cool and our customers generally loved us. There was an "underdog being successful" feeling around the company.  Generally, we paid base salaries much lower than the market in a hot pre-Y2K employment market.  This was very deliberate, in part due to our "bootstrap" culture and in part, because we want to hire people who were joining us for reasons other than just for the money. To hire great people, who often had many competitive and better cash offers, we had to sell why the candidate they wanted to choose PeopleSoft.  From 1996 to 1998, we grew from around 1500 employees to 7000 so we got pretty good at selling "Why PeopleSoft?"

Here are some rules of thumb that I have learned in recruiting great employees:

Passion. If you are not extremely passionate and open about why you are personally at your company, you are missing your best weapon to recruit great talent. People want to work for leaders that are driven and passionate. Use your passion to create their excitement.

Selling Vision.  Most entrepreneurs want to change the world, or at least their part of it. They see a business problem, a solution to make it better, an identified market and a plan to grow their company to an "outcome". The outcome will vary but range from "build and sell", to "build and IPO" or to "build until world domination is achieved". Regardless of the outcome, the successful journey is worth a lot to the participants in non-monetary terms. It may be a stepping stone to their own plan to become a CEO of a start-up or just a great resume builder that leads to a bigger job. Regardless, tie your candidate's personal agenda to yours.

Selling the value of Equity. I was at PeopleSoft because I believed that I would be financially better off with Options rather than taking a larger base salary somewhere else (which proved true). PeopleSoft had a generous employee stock option plan which awarded options based on performance to all levels of employees. I used the growth of my personal options portfolio to educate candidates on the potential opportunity. We were public so this was easier to do than if you are with a private company because there was a daily share price. Still, we had to be extremely careful that we were not implying promises, but by telling history, we could show the real potential for sharing in equity growth.  As a private company, I would suggest you translate the options you are offering into scenarios for what a few future outcomes could look like. Make sure the candidate understands that these are possibilities, not promises.

Tell your story.  For example, you are offering a candidate options currently worth $50,000. The Company has $2M of SaaS revenue. Your strategy is to grow to $4M revenue next year, $8M in the following year and $15M in the third year. At that time, you speculate that the company valuation will have increased from $6M to $60M so the options being offered will now be worth $500,000 less  the $50,000 strike price. If you can exit in three years, the option payout for the candidate would be $450,000. If you don't exit in three years but keep growing, your plan is $23M revenue in year 4 and $30M in year 5. Your valuation will likely be $120M and the candidates net options will be worth $950,000. Also, provided certain conditions are met, the employee may deduct 50% of the amount included in income, with the result that the taxable benefit relating to the exercise of the stock option is taxed similar to capital gains rates. If you grant Restricted Stock instead of Options, the employee may be eligible to receive the first $750,000 of capital gains tax-free.  Make sure you put the appropriate disclaimers on your story by telling the candidate that they need to decide whether they believe the growth and valuation plans are achievable and that they will need independent tax advice to understand the tax implications of their equity.

Sell bonus upside over base salary.  If you can't pay market value base salary, pay for over-achievement of objectives, but tie those objectives to company financial performance so you can afford the upside. For example, if the company over-achieves its revenue and margin objectives, you should have more cash for bonuses. Aggressively share this over-achievement if you can't compete on Base Salary. If you are trying to attract more aggressive employees with higher tolerance for risk, this is a great way to separate the conservatives from the risk takers.

A mentor of mine from way back in IBM sales days used to say "Save some of your best selling abilities for internally in IBM so you can get the support and resources you need to be successful."  The same goes for recruiting. Don't think it is only customers that you need to sell. In today's talent management wars, save some of your best selling abilities for recruiting new employees.