Webinar Recap: Avoiding Bad C-Suite Hires in Private Equity Portfolio Companies

Bad C-suite hires are a real possibility in the tight labor market for private equity portfolio companies.

The negative effects of a C-suite mis-hire on company growth and culture means that companies must take care to find the right candidate for their executive roles. But there are best practices for search and recruiting to ensure companies can right C-suite hires in a timely manner to drive growth in the increasingly competitive private equity market.

That was a key takeaway from the panel discussion in our recent webinar with our CEO Eric Walczykowski and Partner Tess Fischer, featuring special guest panelists Brian Kasser, Talent Partner at Welsh, Carson, Anderson & Stowe, and Mike Song, Managing Director, Portfolio Operations at Providence Equity Partners.

You can view the replay of the webinar here: Webinar Replay.

The Costs of a Bad C-suite Hire

Eric compared a bad C-suite hire to an iceberg. There are immediate, obvious effects, like lost compensation and time. But the lingering, long-term effects that are not so obvious – the majority of the iceberg hidden below the waterline – can permanently damage a company’s ability to achieve the investment thesis.

Some of the direct costs include wasted compensation, misaligned strategies and poor execution that force companies to pivot, and recruiting time and costs. The less obvious, indirect costs include the impact on the company’s brand and reputation and lasting staff morale issues after a C-suite departure. A bad C-suite hire can also have negative strategic impacts, such as delays in value creation plan execution and a longer than expected hold period for the parent company.

Brian described the impact of a CEO hire on the rest of an organization: “It all starts with the CEO…. The next layer of executives — the C-suite, the EVP level — they follow that lead, either good or not so good. From there, it trickles down the organization.”

Eric agreed, citing Bespoke’s study of the last six years of portfolio company turnover, featured in the Private Equity Talent Benchmark Report, available here. One of the correlations found in the research was that if the CEO role was going to turn over, the executive often turned over in the first six months. It is critical to hire the right CEO the first time, and, if you land an “A player” then soon other A players will join the team.

Trend: A Tight Market for C-suite Talent

The immense private equity deal volume in 2021 created a tight “seller’s market” for leadership talent, and this trend continues today. Eric explained that there has been a surge in C-suite turnover as demand spiked; there are more companies after a fewer number of executives. This resulted in a 16% increase in average OTE compensation packages for C-suite executives in private equity from 2018 to 2022.

“It’s always a seller’s market,” Mike said, describing how the focus is always on finding the best CEOs and managers possible. “And so it necessitates creativity.”

He went on to describe how taking a look at Step-Ups – executives in lower level roles who may excel at the top job – is an approach to reducing the pressure of the tight market. “Regardless of the market landscape… and all those externalities, you have to run your own race. We always set a high bar… We’re not going to settle for a candidate just because the market is tight.”

Brian noted that we might always be in a seller’s market: “The best people are always the best folks out there. That doesn’t change. And in a market like this, even when there’s a big turnover and the markets are down, there’s not typically more supply of great executives. There’s a massive demand for the best executives on the market.

“There’s always going to be a fight for that talent.”

One way to navigate this tight market is to expand the talent pool and approach the recruiting process with flexibility. Tess noted that she actively works with clients to expand the talent pool by considering Step-Up candidates as a great way to open up the scorecard, with Eric noting that a step-up candidate may be less risky than a proven sitting executive because they work so hard to get the role.

Choosing Between Hiring Fast and Hiring Right

When it comes to hiring C-suite leadership, some say you can either hire quickly or hire right, but not both.

But the panelists contended that there are ways to do both, as long as you take a strategic to achieve this in the tight market. Brian explained, “There is a very systematic, execution-oriented approach to both solving speed and quality… but you have to have an execution mindset and you have to take a whole different approach to search and hiring if you’re going to be able to solve this problem in a really competitive market like today.”

Tess reflected on her experience placing senior executives with close to a 99% success rate, meaning the executive is in the leadership role for at least two years after placement. She specializes in placing Go-to-Market leads in functions such as sales, marketing and customer success.

The formula for hiring the right candidate without sacrificing speed depends on “having a partner and a team that is execution-focused,” Tess explained. “And ensuring that you are not short cutting the process but that you are also moving quickly, asking the right questions throughout, and responding to what candidates are saying and what’s happening in real-time.” She also highlighted the detailed search process at Bespoke: “We know how to compress it and how to delve deep when we need to.”

Consulting with an executive search firm that focuses on a relevant industry can also assist in hiring fast and hiring right. For example, Eric noted that Bespoke recently launched its Strategic Resourcing Group, with actionable executives at the ready. “By focusing on the network, we know who is available and oftentimes can solve a search before we get started,” Eric said.

Best Practices to Reduce Mis-Hire Risks in a Tight Market

To remain competitive in the increasingly saturated private equity market, companies must adopt strategies to mitigate the risk of mis-hires.

With the advent of technology in executive search, we have seen an exponential increase in our reliance on data. But Brian pointed out that it is important to also see “behind the curtains” of the data and the resume to get a full perspective of a candidate’s qualifications and make the right hires.

Mike suggested that private equity firms and portfolio companies consider how they can use their own resources to support the hired candidate to do the best they can in their role. Talent is the most effective lever for growth and value creation in private equity portfolio companies, the panelists agreed, so a key part of the investment thesis should focus on how to bring out the best in leaders and their teams.

Tess highlighted the value of specialization in reducing mis-hire risks, citing Bespoke’s specialization in private equity software firms which can lead clients to a focused network and relationships that help early on in the executive search process. Without that specialization and focus, the executive search may take longer and result in a hire that ends up being a poor fit.

Getting The C-suite Hire Right The First Time

We appreciate Brian and Mike joining Eric and Tess for a masterclass webinar on the immediate and long-term effects of bad C-suite hires, as well as how to avoid bad C-suite hires in today’s competitive market.

Read more about current trends in the equity portions of executive compensation packages, how “step-up” hires compare to “sitting” hires, and much more in Bespoke’s Private Equity Talent Benchmark Report for Q2 2023.

Looking for new C-suite leaders for your private equity portfolio company? Get in touch to see how Bespoke Partners can help find the right candidate: www.bespokepartners.com/contact/.