The Leets Consortium - Southern California Executive Employment Report

Peter J.Leets
Managing Partner

Southern California Executive Employment Report

August, 2005

TLC's quarterly report focuses on the current state of the Southern California labor marketplace, with emphasis on the executive employment component.

Executive Summary

The economy will remain relatively strong throughout the remainder of 2005, and executive employment will continue at its currently elevated rate. Outstanding economic issues like balance of trade, rising interest rates, petroleum costs, our deficit, the specter of China's economy and currency and the Middle East situations will not offset the positive forces and our current momentum. Compensation will continue it's current shift toward more leverage, and annual raises will continue to average less than 5%, causing an ever-growing number of executives to increase their income by changing employers. Relocating executives to Southern California will remain prohibitively expensive, although more and more employers are finding they need to accept this expense to get the right candidate. . .while it remains a near impossible consideration for middle managers. Executive coaching and other non-financial executive benefits will remain focal points, as will succession development. Unemployed executives will continue benefiting from the most robust job market since 2000. WARNING: For the first time in more than two years, we are seeing signs that the economy and the executive marketplace may be weakening. Based upon today's climate, this shift may not become readily observable until Q2 2006. More information later.

Executive Compensation Changes

Corporate leader's incomes continue to skyrocket. "The CEO's at 179 large companies, who had no changed leaders since last year, were paid about $9.84 million on average, up 12% from the prior year, according to Pearl Meyer & Partners" reported Claudia H. Deutsch of the New York Times. Kathy Kristof of the LA Times reported that CEO's at California's largest 100 public companies took home 20% more than the previous year, well above the 2.9% average for California. "There's a different market for executive level jobs, says Nadine Winter, compensation consultant with Watson Wyatt in Los Angeles. If one company pays more than the market rate and others feel they have to compete to get top talent, that's what they do. The market has its own momentum." Says Chris Bull, Managing Director, McDermott & Bull, "This year has certainly brought an increase in total compensation to the seasoned senior leader. Demand is high and quality senior talent is scarce."

So where's all this money coming from? Simple. Corporate America was cutting back on employees and holding compensation pretty flat during the early years of this decade helping drive corporate profits up approximately 50%. Much of the increase in executive income we're currently seeing is the result of exercised stock options in companies with these significantly higher profits. Looking forward, we expect the transition from stock options to restricted stock to quicken and intensify.

Judge Chandler's ruling, while favoring Michael Eisner and Disney's board in the determination of the Orvitz severance package, sends strong messages concerning: the composition of corporate boards and the rationale for board member selection; determination of separation compensation and what constitutes appropriate amounts; and what constitutes appropriate management of corporate boards. We might look forward to more cautious separation packages for executives and perhaps less passive directors who are more questioning of CEO authority.

Finally, here are some meaningful executive compensation statistics highlighted in Execunet's 2005 Executive Job Intelligence. The 2,811 respondents had an average annual compensation of $196,300. Their findings include: 21% of job offers included an employment contract; guaranteed severance averaged 8 months; 25% received sign-on bonuses; 19% received guaranteed 1st-year bonuses, averaging 13.5% of salary; 25% received stock options/equity, equaling 23% of salary; 70% had performance bonuses, averaging 28% of salary; and 32% received a performance review within the first 6 months.

Looking forward, we anticipate that executive compensation will remain heated matching the employment marketplace throughout the remainder of 2005. As we move into 2006 we will not be surprised to see executive compensation changes moving in the opposite direction. Look for lessening leverage in bonuses. . .fewer executives eligible for long-term incentive plans. . .and salary increases beginning to moderate.

Our Executive Job market Through the Expert's Eyes

"The typically slower summer months in the executive search industry have proven to be anything but slow. The thirst for senior talent across functional lines has continued into the third quarter," says Bull. We agree with Chris' assessment, which is echoed by other executive search leaders we polled. Elliot Gordon with Korn/Ferry International, the world's largest executive search firm concurs: "The news is good on the executive hiring front. Executive demand has definitely increased, and remains at a high level." We remain in a strong executive market.

The July employment report seems to support the expert's comments. The Labor Department reported 207,000 new jobs during July, as the unemployment rate dropped to 5%, a 40-year low! Meanwhile, The Orange County Register carried a U.S. Census Bureau report announcing Los Angeles County with 235,000 businesses the highest in the U.S., while Orange County 5th, with 83,164. "The economy overall is doing well, and the current economy looks very good and very strong through the rest of this year," said Jack Keyser, Chief Economist of the Los Angeles County Economic Development Corporation. "We're expecting continued growth for business." In fact, the 2nd quarter marked the 9th consecutive quarter the U.S. economy exceeded a 3% growth rate- topping the average growth rate of the 90's! It is no wonder that Southern California executives have been enjoying such rapid, successful transitions during the last few years. We're seeing the same movement with our clients at TLC. Most of our executives are receiving multiple offers and are positively employed within five months!

Considering A Job Change?

If you've been considering changing jobs, the next 6 months may be the best time for several years to come. Many experts are now warning of, or forecasting, an economic cooling fairly early next year. Ethan Harris, Chief U.S. Economist with Lehman Brothers, in MSNBC calls for a slowing growth rate of 2.5% next year, saying " He sees a significant risk that the housing market will cool substantially." His view is shared in large measure by Alan Greenspan and Chapman University. The Economist recently said: "The whole world economy is at risk. The IMF has warned that, just as the upswing in house prices has been a global phenomenon, so any downturn is likely to be synchronized, and thus the effects of it will be shared widely. The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion." Kelly Spors, writing for the Wall Street Journal said, "But as home prices surged and interest rates hit record lows, consumers took out bigger mortgages and started tapping their escalating home equity like a credit card. U.S. regulators kept interest rates low to keep the economy chugging." "It was probably a good strategy in that we needed something to boost the economic downturn," said Dean Baker, founder of the Washington think tank Center for Economic and Policy Research. "But it sets us up for an even worse crash when housing cools. In the long term, we'll probably regret it." No one we know has a working crystal ball. . .however, if you're thinking about it, now may be the time!

Closing Thought

We were saddened by the announcements of the move of Fluor's corporate headquarters to Dallas and of the acquisition of PacifiCare by United Health Group. While there are clearly many positive effects of these changes, we can't imagine how the loss of corporate headquarters for Orange County's two largest corporations can be good for executive employment here, in Southern California.

Best wishes for continuing happiness & success!

Peter

References:

41 Southern California employer and search firm responses to six specific questions
Q2 TEC Confidence Index
2005 Executive Job Market Intelligence
Los Angeles Times, March 9, 2005
The New York Times, April 3, 2005
Los Angeles Times, April 8, 2005
The Orange County Register, May 8, 2005
Los Angeles Times, May 21, 2005
Los Angeles Times, May 31, 2005
The Orange County Register, June 5, 2005
The Orange County Register, June 23, 2005
The Economist, June 18, 2005
Los Angeles Times, July 13, 2005
The New York Times, July 14, 2005
Los Angeles Times, July 15, 2005
The Orange County Register, July 15, 2005
The Wall Street Journal, July 17, 2005
The Orange County register, July 19, 2005
The Orange County Register, July 20, 2005
Los Angeles Times, July 20, 2005
Los Angeles Times, July 21, 2005
The Orange County Register, July 24, 2005
Los Angeles Times, July 30, 2005
MSNBC, August 5, 2005
Women's Wear Daily, August 8, 2005
The Orange County Register, August 9, 2005
The New York Times, August 10, 2005