October 18, 2018
“More than half of CEO turnover at portfolio companies is unplanned, leading to longer hold times and lower returns for private equity firms”, says Keith Button in a March 2018 Mergers & Acquisitions column. The costs of turnover including replacement, lost productivity, and on-boarding are estimated to be one (1) and two (2) times the executives total annual salary, and these costs are increasing.
“Voluntary turnover is projected to cost U.S. companies more than $600 billion this year, as one in four employees is projected to quit and to take a different job. Furthermore, if the voluntary quits rate continues as projected, turnover costs will increase to nearly $680 billion in 2020, a 19% increase from 2017,” says the Work Institute in its 2018 Retention Report.
Unplanned exits of key leaders may also contribute to reductions in employee engagement, customer satisfaction and reduced productivity. Each element of this cascade has its own economic and cultural implications.
The good new is, when managed correctly, an organization’s “ability to attract and retain quality staff, including the top team,” contributes significantly to its ability to grow successfully, and is number 4 on the list of top 7 drivers of middle market growth, as reported in “The DNA of Middle Market Growth” (National Center for the Middle Market).
Here are four steps you can take to avoid unplanned turnover and increase the quality of talent at the executive level:
Get clear about context. Leadership success is as much about an individual’s suitability for a role as it is about the environment or circumstance in which you expect them to perform. Clarity about the nature of the operation you intend to build is a crucial first step to identifying great leadership fit. Will your new acquisition or portfolio company be focused on high-touch customer relationships, creativity and innovation, and team collaboration? Or, will it thrive on the implementation of lean operations, stronger quality controls, and structured processes?
Assess leadership talent. An appropriate leadership assessment protocol can be employed, once the context has been defined. Identify the skills, experience, strengths, capabilities, and areas of development for prospective leaders and compare them to the technical requirements of the role. However, these should be viewed as the minimum qualifications. Evaluating an incumbent’s or candidate’s behavioral, strategic, and cultural alignment with the team and organization you intend to build is equally as important to ensuring long-term success.
Define and communicate expectations and success criteria. Connect strategy and measurable outcomes to individual and organizational performance. Establish clear levels of authority and autonomy and set behavioral expectations. Think of these as the ‘what’ and ‘how’ of success, critical components of the goal-setting process. Work with your leadership team to jointly establish milestones for specific outcomes. Create a disciplined process for meeting with, reporting on, and providing both quantitative and qualitative feedback.
Build relationships. Establish an on-going, reciprocal communication process. During your conversations evaluate and recalibrate expectations, together. Create opportunities to candidly share observations about demonstrated strengths and areas of improvement – diversity of thought, transparency, and genuine curiosity from all members of the team builds trust. Clarify role responsibilities and check for alignment with the strategic and tactical requirements of the organization. These discussions can help you identify and resolve issues early on, reinforce positive outcomes, and celebrate successes.
Although there is no sure-fire way to avoid unanticipated loss of key talent in an organization, following these steps during due diligence, early in your integration process, or as part of restructuring can aid in ensuring you have the best talent in place to achieve success. Solid planning and a bit of discipline can help you reduce leadership attrition resulting in shorter hold times, higher returns, improved growth rates, as well as increased levels of employee and customer satisfaction.
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