Whether it’s a decision on if to replace an incumbent, or choosing between two candidates with different comp expectations, we often get asked by clients “but how much is it be worth?”. In other words, what is the value of a ‘good enough’ executive team member versus a star performer.
As a firm focused on organisational effectiveness and executive search, our answer of “a lot” perhaps comes as no surprise. However, a qualitative answer on such a critical matter, often with a short-term financial downside, does not always suffice. As a result, we’ve been developing ways to better measure the importance of getting the executive team right. Linking hiring to revenue, profit and value. Aiming to add some financial rigour, to the often subjective area of talent management.
The worked example below shows how the impact of executive performance on value can be quantified. It also shows how the magnitude of potential impact –getting just one role in the executive team right can be the difference between your strategy generating $20m and $100m of value.
Worked Example – The Value of an Executive Hire
Imagine a successful European based tech company. After a period of high growth in their home market and three local countries with a cultural and market similarity, the firm has just raised its latest funding round. They’re now looking to expand into four other European countries and the US. The markets differ culturally and in terms of market dynamics from the existing ones, but the large market sizes make them attractive.
The Chief Product Officer (CPO) is super smart. They had a few years of experience at another domestic start-up before joining the firm as one of the first employees. Their market insight and ability to build a fantastic product have been critical to the firm’s success.
However, concerns have been raised about their ability to lead the Product function through the next phase of growth. Product will be one of the critical functions to successfully launching in new, divergent and complex markets. The current approach to Product is too centred on the firm’s home market, with success in market entry to date being supported by the other market’s similarity to the home market. The Product function does not have a systematic approach to understanding local needs and prioritising the product roadmap across competing requirements in a fact-based manner.
The question arises if the current CPO should be replaced with a more experienced, international operator, to accelerate and de-risk delivery of the strategy.
To understand the impact of a new CPO on financials and value, we first need to develop a driver tree. The driver treebelow links Product KPIs to the company’s valuation.
We can then consider how with the current CPO, these metrics may be worse in new than existing markets. If the current ‘intuition’ based approach to product roadmap development continues, then the KPIs will likely be worse:
- Retention: driven by the app not meeting local customer needs
- New Users: driven by a lower NPS, stifling organic growth
- Feature Adoption Rate: driven by lower user time on the app, and it not meeting their needs
Whereas with a new CPO, who has experience running international Product teams, these problems can be avoided. The metrics can be as good in new as in existing markets.
With some illustrative assumptions the impact on financials and value can be estimated, two years after entering the new markets:
This is an approximation based on high-level assumptions, and at this point you may wish to consider some additional factors such as:
- Coaching: could the current CPO put in place an upgraded approach to product development with coaching and / or mentoring?
- Worse Performance in Existing Markets: to what extent do we think performance in existing markets would suffer from replacing the incumbent CPO, e.g., loss of knowledge, product team engagement / retention?
- Magnitude of Impact: would it be reasonable to assume a smaller impact on retention, new customers or feature adoption of the new vs. incumbent CPO?
- Compensation: would the new CPO expect a higher salary and benefits than the incumbent?
However, the scenarios highlight how the same strategy, with two different CPOs, could generate $23m or $95m of value for the company. A whopping $72m difference! Even when the additional considerations are taken into account, it appears appointing a new CPO with international experience will be a critical and necessary step for the company in delivering its strategy.
Broadly we think there are two conclusions from our analysis. First, it is possible to quantify the impact of a new executive on performance. Secondly, at least in some cases, executives can have a large impact on performance and valuation, and so can justify difficult decisions and high compensation packages.
Clearly there is more work to be done to transition the art of executive assessment and recruitment into a science. But we hope this is a helpful first step, and we look forward to further progressing our thinking with our clients in this exciting new area.
If you want to find out more about our thinking? Get in touch to talk with someone in the team.