85. Executive Recruiters

The Economics of Everyday Things is sponsored by WaterAid, changing the world through water. Imagine walking miles daily to collect water because your home has no taps, no toilets, no clean water.

That's the reality for one in four people worldwide. Your support can change everything for them because everything,

health, food, opportunity, starts with water.

Donate to WaterAid and your gift will be matched, going twice as far to bring clean water to everyone, everywhere. Donate at wateraid.org/slash podcast.

You know, Donald, I just want to scream out into this canyon and tell the whole world T-Mobile's Got Home Internet. Do it, Zach! T-Mobile's Got Home Internet!

Let me try! T-Mobile's Got Home Internet!

How much is it?

Just $35 a month! And it's guaranteed for five years. I'm switching.
It's true. T-Mobile's got home internet, just 35 bucks a month with autopay and any voice line.
And it's guaranteed for five years.

Taxes of these supplies, ctmobile.com/slash ISP for details and exclusions.

Imagine that you're on the board of directors at a Fortune 500 company, and the CEO just told you she's going to step down.

You have to find an experienced, charismatic, and operationally astute successor, preferably one who knows the industry, and you only have a few months to pull it off.

But you can't exactly reach out to your competitors to see if they're interested in sending over some of their executive talent.

So, you might decide to get a little help from an outside consultant, a professional headhunter.

Maybe a better term for us is, you know, unicorn hunters.

That's Julian Ha. He's a partner at the executive recruiting firm Heydrich and Struggles.
We're out there looking for the purple unicorn, and then they say, well, we want a polka-dotted purple one.

I said, well, we have striped ones and we have square ones, but the polka dot one's going to be tough. CEOs might not be mythical creatures, but they're certainly a rare breed.

There are only a few people who have the right qualifications to lead a multinational corporation. And finding them is only one part of of Haas's job.

The executive search 20, 20, 30 years ago was probably more based on your Black book, right? Who did you know? Who's in your Rolodex?

These days, there's Google, there's LinkedIn, there's all these ways to find people.

The value that we try to add as an industry is the search, the selection, the filtering, the assessment, the referencing, and then guiding our clients to help them hire their next leader.

For an executive recruiter, there's a lot on the line. If you find the right candidate, you could earn a substantial payday for yourself.

But one bad placement and your client's stock could take a nosedive.

One of the things that you become aware of in this work is that you're impacting millions of lives, not figuratively, literally. The stakes are high.

The organization's trajectory is going to be determined in large part by the CEO and the team that serves around them.

For the Freakonomics Radio Network, this is the economics of everyday things. I'm Zachary Crockett.
Today, executive recruiters.

There are recruiters in just about every job sector in America. They message engineers on LinkedIn.
They email corporate lawyers with job offers.

They poach doctors for hospitals, wind turbine technicians for energy companies, and long-distance truckers for transportation firms.

They're hired by corporations to find and assess the best professionals on the market. We are bombarded every day with folks who would like to grab coffee and get to know us.
Again, that's Julian Ha.

There's a misunderstanding that a person who's looking to find their next role is going to hire us to help them find it. That is not the case.
Our clients are not the talent.

Our clients are the companies that retain us.

If you're sourcing, say, computer programmers for Google, there are thousands of potential candidates at competing tech firms that you can reach out to.

But if your job is to hire Google's next CEO, the small pool of plausible candidates aren't easy to reach. That's where executive recruiters or headhunters come in.

We are retained by Fortune 1000 companies, foundations, trade associations, academic institutions to help them with recruiting their next leader.

We find positions such as CFO, general counsel, chief marketing officer, CEO.

Five big firms control the executive recruiting industry. Spencer Stewart, Heydrich and Struggles, Russell Reynolds Associates, Egon Zender, and Corn Ferry.

They go by the acronym Shrek, spelled like the green ogre from the DreamWorks movies. Haas firm, Heydrich and Struggles, is the H.

They've worked on some of the biggest CEO placements in the corporate world.

We have done CEO searches for Google, for Intel, for Uber,

for Microsoft, a number of prominent think tanks and cultural institutions, the Kennedy Center. We're currently in the market for the head of the American Medical Association.

That's a situation where you need someone who understands the world of healthcare and medicine, but also what it's like to walk in a physician's shoes day in and day out.

The job of recruiting executives has become more important in recent years.

The median tenure for a CEO of an S ⁇ P 500 company has declined by 20% over the last decade to just 4.8 years.

Since the pandemic, which put corporate America under extra pressure, CEOs have quit in record numbers. But there's still a finite amount of CEO openings at top firms.

And even the most successful executive headhunters might only be working on 10 or 20 candidate placements a year. That's definitely not a volume game.

James Stevenson is the global vice chair of board and CEO services at Corn Ferry, the K and Shrek.

It's the largest of the five big executive search firms with annual revenues of $2.8 billion.

Stevenson's job is to help corporations come up with succession plans for their top leadership roles. And that process begins years in advance.

You want to know the best time to start? The first day of the new CEO.

And the reason for that is it takes a long time to cultivate the leadership skills of a really great CEO.

Inside a corporation, the CEO search process is typically led by the board of directors, the committee elected by shareholders to oversee a company's management.

Once the board brings in an executive recruiting firm, there is a series of informational meetings. where the recruiters learn why a leadership change is coming and what the company is looking for.

What we want to to start with is the business agenda. What are the things that are going to define success or failure in the future?

And then from there, you look at, okay, if those are the outcomes that we're looking to achieve, then what are the things that need to be in place for the candidate to have credibility and capability?

Armed with the demands of the hiring company, an executive headhunter will begin their search. Stevenson says this is often one of the easier parts of the job.

We have so many different tools today and access through the internet, through LinkedIn, through artificial intelligence. I think there'll be a lot more even into the future.

And so identifying who's in a particular role and understanding the company that they're serving in is not as difficult as it once was. Today, the access to the information is reasonably easy.

The question is, who is that person and how do they play out in a particular company situation? Most headhunters have their own extensive roster of connections from years of schmoozing.

We're talking to people every day, all day. You may not have a reason to think about that person today

for anything specific, but you certainly remember. And then when the appropriate time comes up, you already have, you know, a sense about it.

If I've done enough searches for Fortune 50 companies in the industrial sector, I will know 10 people I can call right away, at least as a starting point.

They may not all be candidates because some of them are very happy where they are, but I will trust them to know people that they regard highly that they will suggest, say, Julian, do you know so-and-so?

I'll make the introduction.

For CEO roles, headhunters are often looking at people who are already CEOs CEOs elsewhere, preferably at companies of a similar size.

It takes the average CEO 24 years to achieve the top corporate position, so most have already been extensively tested in public roles.

But Ha says a big part of the job is also finding unpolished gems.

We're scanning the market to see who are the up-and-comers, who are the people whose name keeps coming up when we talk to other executives.

We attend conferences, we attend gatherings, and folks who present, who speak, who write a white paper will raise their own visibility.

And when we're at those conferences, recruiters in general will take note and see, oh, well, that seems like a sharp person.

And, you know, we should probably keep that person as a next-gen talent in our minds. Many companies prefer to focus their search on the candidates they already know best, their own employees.

In 2024, 77% of CEOs hired by S ⁇ P 500 companies were already working at the company. When you are observing someone over a five to 10 year period, you know them pretty well.

You know what all their warts are, right?

And all of us have downsides. So the fact is that when you're looking at an external candidate to the company, they have warts too.

The question is, do you know what they are and are you picking the warts you most prefer? Another consideration, although not the primary one, is diversity.

In 2023, the CEOs of 37 of the 50 largest companies in the Fortune 500 were white men. Only eight were women and just seven were people of color.

In recent years, recruiters have tried to present corporate boards with a more balanced pool of candidates.

If you want to have access to the best talent, then you can't just have only one type of person in your mix. The fact is that women are a huge percent of the population in MBA programs today.

So if you have women that are coming up through the pipeline, then you better have some women in your finalist candidate pool. Because if you don't, you don't have the best talent.

And when you look at the stats, financial results of diverse executive teams are consistently strong.

Regardless of who the candidate is, headhunters are looking for a few core competencies. You have to know how to run a business.

You have to understand how to change in response to circumstances, whether that's market trends or geopolitical shifts.

And increasingly, you have to be willing to be a public figure who can give an eloquent interview on CNN CNN or defend corporate policy at a congressional hearing.

As a baseline assessment, headhunters will do some informal outreach.

We've been trained in what we call a competency-based interviewing technique.

So we go through the candidates' history, getting anecdotes, getting evidence of what they say they've done, how they did it. It's a pretty methodical interrogation, I guess.

At the end of the initial sourcing process, recruiters compile a long list of candidates that might contain as many as 150 names. And then it's time for those names to go through the CEO meat grinder.

We've had candidates come in and stand at a podium and do a mock presentation as if they were at the annual meeting. What's their energy level? What's their communication style? Are they engaging?

Those are all things that are being tested for. That's coming up.

The Economics of Everyday Things is sponsored by SurveyMonkey. Look, we get it.
You can hardly go anywhere or do anything these days without hearing about AI this or AI that.

And if you're like most people, when it comes to AI, you're impressed, but have a few concerns. But what if AI was used not as a tool to replace people, but as a way to help understand people better?

AI from SurveyMonkey is designed to do just that.

From crafting the perfect survey, which is harder than you might think, to analysis that digs deep, finds patterns, and surfaces trends quickly, SurveyMonkey's powerful suite of AI capabilities makes it faster and easier than ever before to get insights from real people, helping you make confident decisions for your business.

Try it today at surveymonkey.com/slash economics.

The Economics of Everyday Things is sponsored by Rula. Finding a therapist online is hard enough, but finding one who actually takes your insurance, that's even harder.

Rula is a healthcare company that makes accessing affordable, high-quality mental health care easier.

They partner with over 100 insurance plans and match users with licensed in-network therapists and psychiatrists nationwide based on their goals, preferences, and background.

No long wait lists, no frustrating back and forth, just personalized care that fits. Plus, Rula sticks with you throughout your journey, checking in to make sure your care is helping you move forward.

Appointments are often available as soon as tomorrow. And with most patients paying just $15 per session, and sometimes even less, It's care that actually fits your budget too.

Thousands are already using Rula for therapy that's high quality, accessible, and covered by insurance. Visit rula.com/slash everyday to get started.

After signing up, you'll be asked how you heard about them. Let them know this show sent you.
That's rula.com/slash everyday.

Because mental health care should work with you, not against your budget.

The economics of everyday things is sponsored by Acorns. So many people are focused on where their money is today.

Acorns is the financial wellness app that cares about where your money is going tomorrow. And with Acorns Potential Screen, you can find out what your money is capable of.

Acorns is a smart way to give your money a chance to grow. Sign up now and Acorns will boost your new account with a $5 bonus investment.

Join the over 14 million all-time customers who have already saved and invested over $27 billion with Acorns. Head to acorns.com slash economics or download the Acorns app to get started.

Paid non-client endorsement. Compensation provides incentive to positively promote Acorns.
Tier 2 compensation provided.

Potential subject to various factors such as customers' accounts, age, and investment settings. Does not include Acorns fees.

Results do not predict or represent the performance of any Acorns portfolio. Investment results will vary.
Investing involves risk. Acorns Advisors LLC, an SEC registered investment advisor.

View important disclosures at acorns.com slash economics.

During the first month or two of a CEO search, An executive recruiter like Jane Stevenson will chisel down a long list of potential candidates through a series of intensive interviews.

The interview of the candidate is generally handled with two types of professionals. One is what I'll call the market expert.
This is someone that really knows the space the company is in.

So they're living it and breathing it every day. And they are complemented with a behavioral leadership interview that is led by one of our psychologists.

We're also looking to talk to people that they have worked for, people that they have worked with as peers, and people that have worked for them.

It's a little bit like the old story of the elephant, right? When you're touching the tail, it feels very different than when you're holding the leg or touching the trunk.

And so we really want to understand from all the different perspectives how this person operates. This inquisition even extends into the executive's personal life.

If someone is looking to have a particular level of control and balance in their life, that's probably not equivalent to being a CEO. I mean, it is a 24-7 job

and you are always representing the brand that you serve. So you have to be up for that and you have to find that fueling as opposed to draining.

The candidates who pass the test, are subjected to psychological assessments. We're assessing the ways people make decisions.
We're going to look at also the ways that you manage and lead people.

Do you empower people? Do you tend to shut people down? Are you someone that needs to have high levels of control? Contrary to belief, when you become a CEO, you have more bosses than you've ever had.

in your life all at the same time because everyone on the board is your boss. They all have independent views and perspectives.

So it is not a case where you just walk into that office and then start making the decisions in isolation.

Some candidates will even be asked to do simulations.

I like to call it a year in a day.

So there are a number of different situations that they go through in a company that you give them an outline for, and they play the role of the CEO in real life situations.

They'll do a squawk box interview, they'll do a board meeting, or they'll do a review with an employee who didn't meet their quarterly objectives. Confidence is huge, right?

Credibility, gravitas, looking at their ability to have integrity and at the same time be able to tell a story that is effective and to address difficult situations with aplomb and honesty.

Throughout this process, executive recruiters have to operate undercover.

Most of the candidates are gainfully employed elsewhere, and any leaks could have catastrophic consequences for them and for the hiring company. Loose lips definitely do sync ships.

Most of what we do, you can't talk about to anyone. Often we use NDAs so that people are under a legal obligation not to share information about their candidacy.

And even within your close circle, you just don't discuss these things. I've had very few leaks in my career, thank God, because it's emotionally just devastating.

But there was one, and it actually came from the spouse of a board member of this major company. And all of a sudden, all the lead candidates were on the front page of the Wall Street Journal.

What impact did that have on the search? Three of the major candidates pulled out. They didn't want to be under the scrutiny.
It's not a pleasant thing to have happen.

If all goes smoothly, a headhunter will present a short list of finalists to the client's hiring committee.

Typically, if you do a really good job, it's going to be, let's say, three to seven candidates. And then those candidates will be interviewed.
You'll get feedback.

You'll see what the chemistry is like. That'll narrow it down to two or three.

Ultimately, it's the company's decision who they want to go with. Once they've made their choice, an offer is drawn up.

Julian Ha says the recruiter often stays on as a liaison to communicate the terms of the deal.

I usually recommend that a client lets us present the initial offer because that way, if there's a certain allergic reaction or something that they'd rather share through us rather than their future boss, it just takes the awkwardness out.

So I try to socialize the offer and send feedback. Some people might want more long-term incentive, more options, more equity, more risk capital.

Others say, well, look, I would love to do this job, but the reality is I have a mortgage and I have school fees and I have caretaking for my elderly parents and I need more cash.

We can share that with our client who can adjust accordingly or tell us, well, we love this person, but we just can't do it because we have these parameters.

The median CEO pay among companies in the SP 500 is now nearly 18 million dollars a year. And top executives are often largely compensated in stock rather than cash.

In 2024, for instance, Microsoft CEO Satya Nadella received $79 million in total compensation, but only $2.5 million of it was his base salary.

This is an important distinction for executive recruiting firms because they're typically paid a retainer based on the first year cash compensation of the CEO.

If you're talking about a traditional executive search, then it is a third of the anticipated compensation.

That means that if a CEO's cash compensation is a million bucks, the search firm will get around $300,000.

There are exceptions to this. In extreme cases where a CEO has a base salary of tens of millions of dollars, the firm might work out a set fee or a cap.

But regardless of how the deal shakes out, the recruiter who led the effort will usually get a cut of the business they bring in.

Executive headhunting can be a lucrative profession, but people like Jane Stevenson and Julianne Ha are in it for more than the money.

No one goes to college or grad school and says, wouldn't I like to be a headhunter someday? But at its essence, I think what we do matters.

At the end of the day, leaders will shape things, they will guide things, they will create things for good or not. And to be part of that, to have some influence in that process is a privilege.

For the economics of everyday things, I'm Zachary Kraken.

This episode was produced by me and Sarah Lilly and mixed by Jeremy Johnston. We had help from Daniel Morris Rapson.

Is a Coke Zero a typical breakfast for an executive recruiter? You know, it's become my breakfast of champions, Zachary. It's got the caffeine, it's got the fuel I need.

The Freeconomics Radio Network, the hidden side of everything.

Stitcher.

Hey, this is Will Arnett, host of Smartless. Smartless is a podcast with myself and Sean Hayes and Jason Bateman, where each week one of us reveals a mystery guest to the other two.

We dive deep with guests that you love, like Bill Hayter, Selena Gomez, Jennifer Aniston, David Beckham, Kristen Stewart, and tons more.

So join us for a genuinely improvised and authentic conversation filled with laughter and newfound knowledge to feed the smartless mind. Listen to Smartless Now on the Sirius XM app.

Download it today.

Love the night? Reach for Zin after dark, a limited cocktail-inspired series for those who get up when the sun goes down.

Try Zinn's mojito, spiced cider, and espresso martini nicotine pouches. Find them at select retailers.
Available while supplies last. Zin after dark.
Bring on the night.

Warning, this product contains nicotine. Nicotine is an addictive chemical.
Holiday PSA from DSW. This is a reminder that shoes are a gift, literally.

So unwrap something good, like boots that inspire your next big adventure, or cozy slippers that give you an excuse to stay in, or sneakers that feel like pure joy.

Because shoes aren't just shoes, they're exactly what you wanted. Let us surprise you so you can surprise them.
Find shoes that get you and everyone on your list at prices that get your budget.

At DSWstores or dsw.com.