Bidding War

Mainline companies take on the dot-coms in their bid to attract top logistics talent.

By -- Logistics Management, 6/1/2000

It wasn't too long ago that offering a distribution executive a stake in the company was unheard of. That privilege was limited to the inner circle of top corporate executives. This is not the case today, however. As recognition of the role logistics plays in corporate success has grown, companies have come to realize that you need to offer talented, knowledgeable managers incentives besides salary. To that end, companies today are offering stock options-or in some cases, outright grants of stock-to attract the top-notch talent they want.

"At the senior logistics or supply chain levels, they are all getting options," confirms Bill Fello, a managing partner and global industrial sector and supply chain management practice leader at TMP Executive Search, which is headquartered in New York City. "I don't think I've placed a single supply chain or logistics executive in the last three years who is not getting them."

Demand for supply chain know-how has increased in a hot economy with a tight labor market. Yet despite the lure of stock, human resources experts advise managers to make sure any job switch represents a good career move before they sign on to a new venture.

Not Your Father's Traffic Department

As recently as a decade or two ago, most corporations didn't view transportation and logistics as mission-critical activities. Traffic managers-often humorously depicted as drones wearing green eyeshades who spent their days scrutinizing carrier rate cards-weren't perceived as having much influence over business in an era of regulated transportation, where the government set carriers' rates and routes.

On top of that, corporations tended to follow the conventional route when it came to compensating the executives who oversaw the transportation and logistics functions. "Logistics as a function has grown up out of transportation," says Kenneth V. Eckhart, a director in the Coral Gables, Fla., office of Spencer Stuart, a global executive search firm. "As such, the discipline has retained a lot of the old transportation roots and philosophy, which tends to be more conservative than what you'd find in a field like high technology. It had a more conservative pay posture. The base pay was not as high and incentive compensation was lower."

After the market was deregulated in the 1980s, freeing them to negotiate with carriers for rates and services, distribution managers finally had the opportunity to show how they could reduce costs. During the 1990s, as the concept of supply chain management came to the fore with its promise of inventory reduction and shorter order cycles, managers began to demonstrate the value of logistics in generating revenue and boosting overall corporate performance. Today, says Fello, it's generally acknowledged that "[t]he biggest boost to the bottom line other than a hot new product is a world-class supply chain."

Supply Chain Power

Coincidentally, at the same time corporate America began to recognize the value of world-class supply chains, the U.S. economy took off like a rocket. As business boomed and unemployment dropped, a talent shortage developed. Under those conditions, basic supply and demand principles dictated that salaries for supply chain professionals would rise ... and rise they did. Today, recruiter Fello reports, a vice president of supply chain at a company that earns $500 million in annual revenue can expect an annual salary of $350,000. "Finding men and women who are knowledgeable about supply chain management is getting tougher," Fello adds. "Every executive recruiting company is getting inundated with requests for them."

Although logistics executives were now receiving hefty paychecks for their services, it was still unusual for a company to offer employees stock or stock options. When it did happen, it was strictly for executives at the highest level. But the emergence of electronic commerce in the past three years has changed the old ways of handling remuneration.

The start-up Internet retailers were the first to offer stock options to attract logistics executives, whose expertise was sorely needed by Web stores that suddenly had to fill and ship out the thousands of orders placed online. "Every single dot-com, whether a start-up or a spinoff, has very complex supply chain and logistics needs," says Fello.

The practice of offering stock options as part of the pay package, of course, is hardly unusual for companies in Silicon Valley, the hotbed of software start-ups. The dot-coms themselves were merely following standard practice for software companies, which traditionally offered all key employees-not just a select few-stock in the company. And because they needed logistics expertise, many of these dot-coms were willing to part with a considerable share of equity. "If you're coming to run a dot-com and they want a logistics expert, you're talking 3 to 5 percent equity of the company at an early stage [in the company's life]," says Fello. "At a later stage, it's less than half of 1 percent of the company."

Raising the Bar

Typically, the dot-coms offer stock options, the opportunity for an employee to buy stock at a preset price. When the company gets listed on a stock exchange or if the stock market pushes the price of the stock beyond the preset price, the individual exercises his option to buy stock at the fixed price and then resells it at a higher price to an outside investor. If a company's stock soars, the individual could become a millionaire if he or she owns enough shares.

And if that isn't a tempting enough deal, the stiff competition for logistics talent is forcing some dot-coms to sweeten their offers. Some, for example, have reduced their vesting periods. In the past, an employee might have to stay with a company for five years before he or she received the entire promised amount of options. Now, executive recruiters report, logistics managers are getting a larger share of equity earlier on in their tenure.

Some start-ups even offer outright grants of stock as part of the compensation package. "They may give you a stock grant as a sign-on bonus," says Fello. "For example, I give you 5,000 shares at $50 apiece. You just have to pay taxes on that. The stock-unlike a stock option-doesn't cost you anything. There's a lot of wealth being created as this all takes place."

The dot-coms have thus placed pressure on traditional companies to match their stock incentives. "Mainline firms now have to offer stock equity to attract logistics executives," reports Gayle Gorfinkle, an owner of the executive search firm Gorfinkle and Dane in Braintree, Mass. "In the past, they didn't have to offer equity, but now they're competing with the dot-coms that do."

All That Glitters...

Although stock options and stock grants can be a powerful lure for someone looking to get rich, recruiters note that managers should think long and hard before signing on with a start-up company like an Internet retailer. "Dot-coms offer more stock because there's more risk involved," warns Fello.

In addition, managers often have to accept lower base pay in exchange for equity. They also must be willing to put in long hours to ensure that the start-up company gains a footing. "The chairman of the board of a dot-com told me 'I want the person [I hire] to be an Internet thinker, someone who's willing to sleep in a sleeping bag to be a millionaire,'" says Gorfinkle.

Despite the long hours required, start-ups beckon because many executives relish the challenge of building a distribution network from the ground up. "I'm hearing about senior-level people who are ready to make a move for something exciting," says Rhoda J. Isaacs, an executive recruiter at the firm R.I. James in New York City. "The lure of a start-up is exciting itself-not to mention the potential for making major dollars."

Those hesitant to stake their careers on the fortunes of a dot-com, however, can rest assured that base salaries at more traditional companies are likely to keep climbing too. "There are more positions paying in the high six figures than there have been in the past," notes Alex Metz, president of the recruitment firm Hunt Ltd. in Lyndhurst, N.J., "and they don't have to be at the VP level."

As long as the economy stays hot and companies continue to focus on supply chain excellence, talented distribution executives will remain in demand. And that demand, in turn, should result in higher salaries as well as even greater opportunities to obtain stock options. "These days," says Isaacs, "the ante just keeps getting higher and higher."