Executive Employee Selection Strategies and Techniques

Introduction

In the present world of constantly changing economic conditions and advancements within organizations and business environments, the labor market is facing numerous challenges. Research has demonstrated that firms using effective staffing practices — such as conducting studies of recruiting source yield and validation studies for selection tools, using structured interviews, cognitive ability tests, and biodata tools — have higher levels of annual profit, profit growth, sales growth, and overall performance. Taking into consideration the fact that American companies are major players on global arenas and the executives of these companies are their key strategic developers, the work of executives is becoming increasingly sophisticated and multi-functional. Today's executive must be capable of responding to greater requirements for increased productivity, innovation, leadership, and managerial adaptability. Thus, the problem of selecting effective executives is increasing in significance.

According to research conducted by Lievens, recent themes in personnel selection can be classified into major groups: labor market shortages due to increases in qualifications demanded (a new direction is applying marketing techniques to labor market shortage problems), technological developments (Internet recruiting with special sites for special industries), applicant perceptions of selection procedures, and construct-driven approaches.

The recent downturn in the economy, decreases in company profits, and numerous scandals concerning CEOs misusing their power point to the problems that arise when selecting leaders, and suggest that the best candidates must be hired to lead companies through hard times. This underscores the importance of research into the most effective executive selection and hiring techniques.

The aim of this work is to review current personnel selection strategies and their validity in choosing executive employees for corporations, and to investigate probable contradictions within hiring techniques and possible ways to improve and adapt them for screening top leaders. As the research has shown, no detailed study of this kind has been made so far; problems concerning executive hiring procedures have been examined separately and appear in different works and studies. The goal is to recapitulate these problems and find possible solutions. The major questions to be answered are: what are the best possible techniques for choosing the most appropriate senior management candidates, what are the faults within these selection strategies, and how can they be improved?

Over the last decades there has been much discussion on quantitative and qualitative research. The terms "quantitative" and "qualitative" refer to a description of how one chooses to work with and analyze collected information. The way the problem is designed will determine the most relevant method to be used.

A quantitative method is a research technique in which statistical information is gathered and approached analytically, with a mathematical result as the sole purpose. A qualitative method is a research technique based on verbal analytical methods. This approach requires understanding the major concepts within the problem covered and the interrelations of underlying segments.

Methodology

The use of a quantitative research method was limited in conducting this study, as information concerning the practices used in hiring corporate executives is difficult to acquire due to the magnitude of the decisions made within these hiring processes and the prominence of key players in the executive job market. The absence of a study of this kind further proves this point. Thus, a qualitative method was chosen.

There are three methods of conducting qualitative research: explorative, descriptive, and hypothesis testing. The descriptive approach was chosen as the most appropriate for this investigation. Because a literature review was conducted and the key question asked was "what are the main strategies and techniques in hiring executive personnel," no hypothesis is tested. Observation through literature examination was chosen as the data-collection technique within the descriptive qualitative approach. The descriptive method is appropriate when a body of knowledge on the topic already exists and aspects of the phenomenon can be studied with suggestions for further possible investigation.

1. Hoffman, Edward. 2001. Psychological Testing at Work. McGraw-Hill Education Group.
The book provides deep insight into personality testing and the reasons for using tests at work. Personality and major personality types are given thorough descriptions, as well as the best techniques for distinguishing these types. A brief history of workplace testing is particularly useful for tracing back the development of testing techniques. The author has gathered testing samples with their explanations and the areas where they are most applicable. Legal issues within personality testing at work are also considered.

2. Dakin, S. "The Role of Personality Testing in Managerial Selection." Journal of Managerial Psychology, Vol. 9, No. 5, 1994, pp. 3–11.
To answer key questions, a survey of firms engaged in managerial selection was conducted. The study yields very contradictory results and argues that personality is only a relatively minor determinant of managerial performance, and that even if measurement problems in personality testing can be overcome, the ability to predict future performance from test results will be marginal at best. The article argues that unless contexts of behavior are specified in advance, personality tests have limited relevance in selection, and that for most managerial jobs contexts cannot be accurately predicted or specified. Suggestions are made for more effective use of personality testing: measuring the probability of success given the environment or context; measuring person-context fit; developing better theories of personality that are theoretically proven rather than empirically derived; and using tests in an action research mode as a means of structuring a conversation with the candidate rather than as a single predictor.

3. Havaleschka, F. "Personality and Leadership: A Benchmark Study of Success and Failure." Leadership & Organization Development Journal 20/3 (1999): 114–132.
Answers the question of whether the top-level management team makes the difference between a company's success and failure. By using two different assessment tools (developed on the model of the Head-Heart-Leg framework of personality) to map the personalities of members of two management teams, including top executive managers, and by following the development of the companies' results over five years, it is shown that the personality of the executive manager and the team he selects is the key to understanding a company's rise or decline in the market.

Review of Related References

4. Redman, T., and Brian P. M. "Trends in Recruitment: A Ten-Year Retrospective View." The International Journal of Career Management, Vol. 7, No. 2, 1995.
Examines the changing employment market in personnel by comparing recruitment advertisements with their counterparts of ten years prior. Variations over time reflect changes in employer values and in the nature of employment. Finds that HRM is developing as a specific function, experience requirements are becoming more specific, and Institute of Personnel Management qualifications are more in demand. Overall effectiveness of job advertisements has improved slightly, but there appears to be ample scope for further development.

5. Breaugh, J. A., & Starke, M. "Research on Employee Recruitment: So Many Studies, So Many Remaining Questions." Journal of Management, 2000, Vol. 26, No. 3, pp. 405–434.
Demonstrates that a great deal remains unknown about why recruitment activities have the effects they do. Recent reviews have criticized many studies conducted for being poorly designed, narrow in focus, and not grounded in theory. Claims that in order for future studies to produce a better understanding of the recruitment process, they need to be designed with an appreciation of the complexity of the recruitment process, including the number of variables involved and the nature of their relationships. Offers an organizing framework of the recruitment process that mediates relationships between recruitment activities and outcomes, and places specific attention on the importance of well-designed recruitment activities and further research into recruiter/applicant interactions.

6. Spinelli Souza, F., & Zajas, J. "Recruiting Executives in Business: An Organizational and Conceptual Perspective." Executive Development, Vol. 8, No. 3, 1995, pp. 23–37.
Addresses several key topics and issues: selecting executive team players, internal or external recruitment, identifying career requirements, identifying and fostering organizational values, and the selection interview. Points out that the decision to consider an external candidate versus an internal one is not always simple or obvious, and that attributes and values important for the position must be evaluated carefully. Stresses the multi-faceted nature of candidates and concludes that technical, experiential, and managerial factors are all necessary for position success. Describes ways to support the new manager's transition to minimize the time needed for effective contribution.

7. Barclay, J. M. "Employee Selection: A Question of Structure." Personnel Review, 28, No. 1/2, 1999, pp. 134–151.
This is the first part of a larger study into organizations' use of structured interviewing techniques. Discusses reasons for the continued popularity of interviewing in selection despite its shortcomings, and considers the use of two structured interviewing techniques to improve selection: behavioral and situational questioning. The use of structured interviewing is rapidly increasing and is used by organizations of all sizes. Behavioral interviewing is being used more than situational interviewing, and many respondents use both techniques. Structured techniques are most commonly used for management posts. Discusses links with competency-based HRM and the roles of line managers and HR specialists in selection.

8. Lievens, F. "Recent Trends and Challenges in Personnel Selection." Personnel Review, Vol. 31, No. 5, 2002, pp. 580–601.
Identifies recent developments in personnel selection and reviews existing research with regard to these developments. The author conducted interviews with 26 human resource representatives to list current or future trends in personnel selection. As a result, four main trends are identified: labor market shortages, technological developments, applicant perceptions of selection procedures, and construct-driven approaches. Per trend, relevant existing research is reviewed and avenues for further research — including the use of marketing principles and the Internet in attracting applicants and the development of new research methods — are defined.

9. Ryan, A. M., & Tippins, N. "Attracting and Selecting: What Psychological Research Tells Us." Human Resource Management, Winter 2004, Vol. 43, No. 4, pp. 305–318.
Reviews research on what selection tools work, what recruitment strategies work, how selection-tool use relates to workforce diversity, and what staffing and recruiting processes lead to positive applicant perceptions. Advises using a professional in recruiting and selection psychological testing, educating oneself and critically evaluating current developments in the fields, systematically collecting data, and carefully evaluating efforts to make correct interpretations.

10. Delves, Donald P. 2003. Stock Options and the New Rules of Corporate Accountability: Measuring, Managing, and Rewarding Executive Performance. McGraw-Hill Trade.
Discusses the history of executive compensation plans and the need for developing a new system of rewarding CEOs. States that corporate executives in the present era have replaced the monarchs of the past and are now among the most powerful people in the world. Tries to identify the relationship between high CEO earnings and work motivation, and whether some extremely high salaries — 400 times that of the average worker — are justified by performance. Argues that stock options could be a good alternative for providing a diversified package to executives and draws the hypothesis that high executive salaries reflect USA market shortages for talented performers.

11. Hoffman, Edward. 2000. Ace the Corporate Personality Test. McGraw-Hill Professional.
Acquaints readers with personality assessment in the hiring process today. Gives reasons for the current personality assessment boom and recent trends in testing techniques. Analyzes different types of interview questions and discusses them in depth. Describes personality types and the kinds of jobs for which they are most suitable. Advises on how to pass different personality tests and prepare for them effectively. Describes in detail how the following personality traits can be tested: conscientiousness, extraversion, integrity, anger management, entrepreneurial qualities, stress tolerance, and leadership potential. Provides six sample personality tests.

12. Yaverbaum, Eric. 2002. Leadership Secrets of the World's Most Successful CEOs. McGraw-Hill Professional.
The book consists of articles by executives offering advice on how to become a successful leader. Among the advice on continuous professional development, CEOs suggest going through self-evaluation and personality testing to single out one's positive attributes and areas of improvement. The matter of attitude toward leading a business is discussed in detail. Some executives share not only their successes but also their failures, and suggest that one must always admit failures, analyze them, and work to avoid their recurrence.

13. Guerin, Lisa. 2004. Everyday Employment Law: The Basics (2nd ed.). Nolo.
The author describes major employment laws explicitly, including their history, reasons for adoption, and spheres of application. Major court cases relevant to these laws are studied carefully and discussed. Laws concerning the hiring process are stated and advice for prospective employers and employees is provided.

14. Mak, C. "Successful People Selection in Action." Health Manpower Management, Vol. 21, No. 5, 1995, pp. 12–16.
Enforces the necessity of investing both time and resources in attracting, selecting, and retaining staff. Highlights the fact that the traditional interview is a poor selection tool. Outlines a systematic approach to hiring people and describes the structured behavioral interview tool. Concludes that line management should play an active role in staff selection and that organizations should look for better approaches and tools to improve their hiring effectiveness.

15. Weddle, P. D. "Strategies for Recruiting the Best and the Brightest." Available from careerjournal.com.
Provides empirical support for the hypothesis that more successful candidates increase company performance and outlines the personality traits that lead to this. Gives tips to top managers on developing their personnel: challenging work, personal development, advancement opportunities, working with other high performers, organizational support and resources, and competitive compensation. Claims that being a star performer is more a state of mind than the product of any special trick or technique.

16. Byron, L. "Guide to the Selection of Managers & Key Executives."
One of the rare articles written specifically to guide the selection of top-level employees. The selection process is described in full detail. The stages of the process are outlined: identifying, evaluating, attracting, and integrating the candidate. The two main strategies — selecting an internal candidate through succession or attracting an external candidate — are discussed in depth. Possible problems in hiring an executive are discussed and ways to identify the best candidate qualities are reasoned. Every stage of the hiring process is supported with tables to organize information. Ways to improve the selection process are stated, including: planning the selection process carefully, arranging cohesive and objective supervision, limiting the number of primary decision makers, establishing an acceptable pace, and using advisers selectively and creatively.

17. Lahiri, I., & Welker, D. "Best Practices in Recruiting Executives."
Discusses the results of a survey of 30 "best practice" companies on successful methods of executive recruiting. As the survey shows, the best practices yield the greatest results in terms of quality, diversity, and quantity of executive candidates: appropriate staffing and authority, employee feedback gathering and analysis, "grow your own" programs, executive search firms, positive public relations, courting and supporting candidates, and leadership accountability.

18. Kennedy Information Report. "Why Should You Use Executive Recruiters?"
Discusses the reasons for using highly competent executives and why professional executive recruiters should be engaged. The major reasons are: they observe strict confidentiality, can draw on a pool of global labor contacts, bring objectivity and feedback to management, and are cost-effective.

19. HireSuccess (hiresuccess.com).
This site is a useful resource for research and testing of executive employees. It provides a broad overview of executive testing techniques and discusses personality, aptitude, and integrity tests. Sample tests and the reports generated after tests are available for review, along with relevant information on how to interpret the results.

20. Employee Selection and Development Inc. "5 Personality Types."
The site offers many powerful resources for screening executive candidates and provides tests developed especially for this purpose. A very detailed description of all personality types is provided, with each type described from the perspective of its strengths, improvement opportunities, factors that help recognize the type, and approaches for engaging and persuading that type.

21. Thompson, Carolyn. 2002. Interviewing Techniques for Managers. McGraw-Hill Professional.
The book shows how to master every aspect of the interview process to ensure honest, helpful, and results-oriented answers. It provides methods for enhancing planning skills, question asking, listening, dealing with difficult interview situations, and using the information gained to make decisions. Useful for sales people, problem solvers, employee performance managers, strategic planners, customer service staff, hiring managers, and researchers.

22. Edenborough, Robert. 2002. Effective Interviewing: A Handbook of Skills and Techniques. Kogan Page.
Interviews are now so widespread that it is difficult to think of a single profession where they are not used. By taking a comprehensive look at the entire range of interview situations, the author reveals how the process of interviewing has developed and gives practical advice on its use in various contexts, including recruitment, selection, performance management, counseling, and conducting surveys. The book provides detailed coverage of the methods and techniques currently in practice and speculates on the future of interviewing, drawing on the author's extensive experience to offer advice on selecting the best interviewing methods, developing appropriate techniques for particular uses, and linking interviewing with other professional methods such as psychometrics, questionnaire surveys, or assessment centers.

23. Barclay, J. M. "Improving Selection Interviews with Structure: Organisations' Use of 'Behavioural' Interviews." Personnel Review, Vol. 30, No. 1, 2001, pp. 81–101.
Explains the advantages of behavioral interviewing as a method of employee selection and reports on a survey of organizations' use of behavioral interviewing in selection. Both interviewers and candidates were positive about the technique. Benefits identified include better quality information gathering leading to improved selection decisions, more consistency, improved skills of interviewers, and better opportunities for candidates to explain their skills. Concerns were raised regarding the training, time required, scoring procedures, and possible limitations with certain candidates. Concludes that behavioral interviewing has significant benefits and can also be applied to other interviewing situations such as discipline and grievance hearings.

In the modern business world, some executive employee selection techniques are used more than others because they have proven more effective. Knowing their history helps to understand their present development trends. Though it has been thoroughly researched, questioned, analyzed, and criticized, the interview remains the most popular and widely used selection tool in the employee selection process.

At the beginning of the twentieth century, research works on selection interviews began to appear. At that point in recruiting history, the interview was the only "scientific" technique to single out and promote employees, and it quickly became the most commonly used method. It was the beginning of an era of instructions for employers on how to conduct "smart" interviews and articles offering advice for applicants on how to pass them successfully. In 1915, a study proved that the interview had several faults as a worker selection method (Eder, 1989).

Another study conducted by Hollingworth in 1922 proved this point and brought up additional issues about the interview's flaws. His study showed that different interviewers gave completely different rankings for applicants, with ratings ranging from the worst to the best. Moss further challenged interview effectiveness in a 1931 study, which found that among medical school students only 33% who failed their exams were predicted to perform poorly during their interviews. On the contrary, interview results predicted the elimination of 23% of students who then went on to perform with the highest grades. Moreover, analyses by Charters (1927) and Buckley and Eder (1988) established that only personal traits engaged in the course of a conversation can be judged objectively during an interview.

Another technique for personnel selection was introduced at this time as well. In 1915, psychological personality study was first used when the Carnegie Institute of Technology established a Division of Applied Psychology and a Bureau of Salesmanship Research, with the aim of administering scientific selection of sales personnel. In 1916, the first American police department began using psychological tests in the hiring process.

Historical Trends in Effective Recruiting Methods

The involvement of the USA in World War I increased the need for personal intelligence testing, and more techniques were developed to single out the best potential soldiers for the army and professionals for the war effort. The U.S. Army during World War I pioneered a series of so-called trade tests to assess specific job knowledge and skills. These tests generally fell into three basic categories: (1) verbal, (2) picture tests (both using paper-and-pencil measurement of job knowledge), and (3) performance tests, which generally involved hands-on use of job-related machinery. The first standardized personality test, the Woodworth Personal Data Sheet (also known as the Woodworth Test of Emotional Stability), was also developed during this period.

O'Rourke (1929) attempted to work out an effective interview strategy that would "insure an adequate sampling of the qualifications being measured." He also suggested that full records of the interview should be made for thorough post-interview examination, and that a fixed set of standards for interviewers should be adopted to avoid bias.

In 1941, Travers offered the idea of including a practical test within the interview structure. This idea was further developed by Bingham and Moore (1931) and Mandell (1964), who provided instructions for structuring and conducting an interview. The first attempt to organize a structured interview record that included main personal categories was made by Adams and Smeltzer in 1936.

In 1940, the Minnesota Multiphasic Personality Inventory (MMPI) emerged and became the leading personality test instrument for several decades, with innovative questions and subscales to determine whether job applicants were fit for positions. Also at this time, the first technique especially designed for selecting executives was introduced: Sears Company commissioned psychologist Robert Thurstone to create a procedure for selecting executives. The resulting test battery included the Guilford-Martin Personality Inventories (revised in 1949 as the Guilford and Zimmerman Temperament Survey) as well as ability and interest measures. Sears screened more than 10,000 job applicants by means of such personality tests. Abraham Maslow also launched several psychological testing techniques for use in industry and business during this period.

In 1947, Brody presented a new interview technique involving a group interview of 6 to 12 participants who would interact in a discussion, with their appearance, manner, speech, attitude toward the group, leadership, contribution to group performance, and scientific approach observed by passive interviewers. McMurray, also writing in 1947, advocated the well-structured and patterned interview and the necessity of selecting interviewers carefully to ensure they are emotionally adjusted and of adequate intelligence.

With the United States' participation in World War II, the use of personality testing as a means of screening the most efficient soldiers and workers boomed, and this increased the use of such tests in workplaces as well. As surveys later showed, by the mid-1950s nearly two-thirds of large firms were using personality and interest tests in employee selection.

Springbett's landmark research of 1958 found that the majority of interviewers make their hiring decisions in the first two or three minutes of the interview and use the remainder of the time essentially to search for negative features of applicants. "The appearance of the applicant and his application form provide information in the first two or three minutes of the interview which decisively affects the final outcome in 85 percent of cases."

Further research attempted to validate or oppose these employee selection techniques. Huse's 1962 research project, which ranked 107 first-level supervisors from 31 companies, discovered that "the relative validity of predictor ratings based on complete data, including tests, reports of projectives, and the interview was no higher than that for psychometric tests." In 1964, scholar Webster published interview guidelines considered the most cited of their time, advising practitioners to: control the order of input of information to the interviewer; develop an accurate picture of the kind of person desired for a particular job and train the interviewer to accept this model; force an increase in the time required to reach a decision about an applicant; and recognize that bias affecting the decision for or against an applicant may operate from the very beginning of the interview.

Another interesting finding on executive employee selection came from London and Hakel, who claimed that an interviewer searching for a high-quality candidate is more biased toward ranking applicants higher than interviewers who do not carry a high-caliber candidate stereotype. Eder and Buckley suggested that interviewers should use diverse skills for screening candidates for more intricate positions, noting that "the more complex the job the greater the difficulty in adequately assessing the candidate's qualifications and hence, the more reliance is placed on the interviewer's cognitive skills to form a valid judgement."

The adoption of President Lyndon Johnson's "Great Society" legislative program remarkably increased the usage of personality testing at work. However, this also brought much discussion about racial and ethnic discrimination within such testing, as well as concerns about the unreliability of these techniques and the possibility of faking results. This resulted in several employment laws, which are reviewed later in this paper.

In the late 1980s, the employment market for managers and professionals became a buyer's market. The core importance of selecting effective managers as a key element of business success became increasingly recognized, and much attention was placed on hiring effective managers. Demand for managers to increase their professionalism also grew. The traditional psychometric selection model — which emphasized individual job performance, job analysis, and outcome predictions — may no longer be fully effective and relevant, owing to the ever-changing nature of business and the diversity of organizational functions. Another problem is that many new jobs have been created in recent decades, and drawing perfect personal specifications for these new positions through job analysis is therefore difficult.

The Civil Rights Act of 1964 and the creation of the Equal Employment Opportunity Commission (EEOC) challenged the applicability of testing in the recruiting process. Supreme Court decisions in the 1970s defined strict conditions under which tests should be used and the nature of the validation evidence that companies must present upon a legal request. Pressure from psychological theorists made companies reluctant to use these techniques for several decades and increased the importance of interviews and lie detectors in workplace testing. A 1978 study reported that one-quarter of major U.S. corporations were using lie detectors for three key purposes: (1) to verify employee applications, (2) to conduct periodic assessments of worker honesty, and (3) to investigate specific instances of theft or irregularities. By 1985, researchers estimated that more than one-half of the country's retail businesses and over 30 percent of Fortune 500 companies were using lie detectors. Due to the increased number of lawsuits against the use of polygraphs, however, the Employee Polygraph Protection Act of 1988 restricted the nature of questions that could be asked.

In this sense, the recruiting process has become greatly impacted by civil rights legislation, federal regulations, and key court decisions. The two key subjects that dominate employer interest and caution about assessment are negligent hiring (and its cousin, negligent retention) and adverse impact. Virtually every company must now steer a course between these countervailing concerns, and legalities sway how tests are created, implemented, scored, and interpreted.

Federal law and regulation of workplace testing rests on three main documents: (1) Title VII of the Civil Rights Act of 1964, (2) Equal Employment Opportunity Commission (EEOC) guidelines, and (3) the Americans with Disabilities Act. The Civil Rights Act of 1964 lists all employee rights concerning the elimination of discrimination on any basis in the workplace. Specifically, it shall be an unlawful employment practice for an employer to hire or discharge any individual, or otherwise discriminate against any individual with respect to compensation, terms, conditions, or privileges of employment, because of such individual's race, color, religion, sex, or national origin.

The U.S. Equal Employment Opportunity Commission (EEOC) currently has an annual budget of over a quarter-billion dollars. It aims at promoting equal employment opportunities through administrative and judicial enforcement of federal civil rights laws, while also providing education and technical assistance. With 50 field offices, the EEOC has issued guidelines stipulating that all written tests must be validated — that is, scientifically proven to measure what they claim to measure.

The Uniform Guidelines on Employee Selection Procedures was adopted in 1978 by the EEOC, the U.S. Civil Rights Commission, and the Departments of Justice and Labor. Today it plays a major role in how courts approach the recruiting process.

The Americans with Disabilities Act (ADA) was signed in 1990 with the goal of prohibiting discrimination based on disability in private sector employment, public accommodations, transportation, public services, and communications. The ADA defined disability as: having a physical or mental impairment that substantially limits a major life activity; having a record of such a disability; or being regarded as having such a disability. Employment discrimination of qualified employees, as stated by the ADA, encompasses a broad spectrum of employment activities and policies, including recruiting and hiring, training and promotion, rates of pay, job assignments, leaves of absence, fringe benefits, and social programs. Some guidelines specifically address pre-employment interviewing and state that questions concerning disability may be asked only to clarify whether the candidate will be able to perform specific, job-related functions. Furthermore, pre-employment screening tests must be organized in accessible locations and in an accessible manner for disabled people.

Four famous court cases shaped the development of hiring procedure. Griggs v. Duke Power Co. (1971) established foundational standards for employment testing. Albemarle Paper Co. v. Moody (1975) was connected with the adverse impact notion and centered on the issue of what an employer must do to demonstrate the job-relatedness of a psychological test administered to job applicants. Two further cases — McKenna v. Fargo (1978) and Soroka v. Dayton Hudson Corporation (1991) — raised concerns that psychological employment testing violated employee privacy. The conclusion to be drawn is that in hiring procedures, privacy must be protected, and any personal traits tested within skills, aptitude, psychological, and personality tests must be proven to be connected to and to affect performance and productivity in the specific job.

As for other employment laws connected to the hiring process, when submitting job opening advertisements, employers must ascertain that they comply with the law, focusing only on the essential functions of the job and paying careful attention to the literal meaning of the words used. Employers may be sued for not keeping promises stipulated when offering the job; thus, all compensation packages, termination terms, and other issues of major importance should be discussed thoroughly, specified precisely, and documented within a signed employment contract.

"Darwinian economies, governed by the basic laws of supply and demand, vastly favor the strong while eliminating the weak and inefficient. Not only do the strong survive in a capitalist economy, they are also richly rewarded." When the first large corporations started to appear, their size made it impossible for owners to operate and manage them effectively, and it was then that the profession of corporate manager emerged. But even then, the problem of compensating these highly qualified professionals who ran the company but did not own it was a matter of concern. Bonuses and profit-sharing systems were introduced at that time.

From 1939 until 1950, comparing with a doubling of workers' wages, executives' compensation grew by only one third, due to the growing power of labor unions, New Deal legislation, the labor shortage caused by World War II, and post-war release of controls. The introduction in the 1950s of the graduated income-tax structure hit executive paychecks the hardest and led to the development of many types of noncash compensation, including deferred compensation, thrift plans, stock options, group life and split-dollar insurance, and medical and hospitalization plans.

High executive salaries are often explained by America's cultural tendency to favor certain people — movie stars, executives, sports players — and to pay corresponding wages. Another theory suggests that high wages reflect the company's owners' wish to financially motivate executives for better performance. As research by Barron and Waddell has shown, "executives of higher rank, because of their more pronounced impact on the firm's stock appreciation, will not only have a greater proportion of compensation incentive based, but also a greater proportion of incentive-based compensation that is equity-based." About 70% of companies offer a diversified compensation plan, with the average base salary of participants at $136,000. Table 4.1 below presents annual total cash compensation for senior executives at large companies.

Table 4.1. Compensation for Senior Executives at Large Companies.

Source: "The HMO Salary Survey, 45th edition," 2004, Warren Surveys, Rockford, IL. Data effective as of August 2003.

Whether or not one accepts that the well-functioning of large companies depends on one or several persons, the role of executive workers in creating a healthy environment within the corporation should not be understated. In Pay Without Performance, Bebchuk and Fried argue that "executives are often given incentives to pump up short-term earnings at the expense of long-term financial soundness and that CEOs too often get their jobs through over-friendly arrangements with company directors." They investigated 1,000 executives from 1993 to 1999 with respect to layoffs and found that fewer than 1% resigned or left under pressure because of poor performance. Given the downward-trending stock prices of more than a few companies during that period, it is hard to believe that more than 99% of CEOs were doing a good job.

Nevertheless, Brian Sullivan, chairman and CEO of executive-search firm Christian & Timbers, states: "Salaries are coming under intense scrutiny, but they are still going to be tied to performance. Boards know that they may need to pay to get a top-caliber senior executive who can deliver." According to Securities and Exchange Commission filings reviewed by Hewitt Associates, CEOs in 2004 could expect to see an average wage increase of 8.8% and to receive an annual salary of $7.3 million. The worthiness of hiring highly qualified and highly paid executives was studied by McKinsey & Company in "The War for Talent," which found that "top employees make from 50% to 100% greater contribution to their companies than their less capable peers." "A" salespersons grew revenue an average of 52%, while their "B" counterparts averaged just 4% revenue growth. Differences for such candidates in the manufacturing sector were even more pronounced — 129% — and for service employees, 67% compared to less qualified employees. The logical conclusion is that even though the average cost to hire an executive at a salary of $100,000 a year would be $11,630, it does increase company value to hire the best candidates. Another matter is how to select them.

Conclusion

Selecting an executive involves risks and investments and needs to be approached seriously, as with any other strategic corporate decision. Though selecting an executive employee is not fine art, this process should be well-managed. Recent trends in the hiring process reveal increasingly sophisticated techniques and a growing emphasis on the human resource management and development industry. Because executive employees have the greatest influence on company performance, hiring a successful leader is vital for the corporation. This has spurred the development of a whole industry devoted to effective and cost-efficient executive recruiting, as well as the advancement of numerous testing and personality screening techniques to find the best and most capable candidates. These include multi-faceted personality profile screening methods and diverse interviewing techniques. Personality profile testing and structured behavioral interviews have proven to be the most valid and effective tools in hiring executives.