Poaching teams: Anatomy of a lift-out

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Their jilted employers may view them as the worst sort of traitors, but for employees who move en masse to a competing shop-taking millions or even billions worth of business-it can be the opportunity of a lifetime.

Allan R. Starkie, a partner at New York-based wealth-management search firm Riotto-Jones & Company, has executed three 'lift-outs' in the past two years, including one for a European bulge-bracket bank. Starkie says, 'You pay them outrageously large sums of money for portable assets.'

Translation: the defecting group typically nets a sign-on bonus equal to about 100% of one year's revenue allocated according to each person's share of portable business. Paid within the first 30 days of employment, the money is usually structured as a loan forgivable in installments over three to nine years-though employees can be forced to refund some if clients don't follow as expected.

Danny Sarch, president of search firm Leitner Sarch Consultants, works with retail brokers who frequently move in teams of two, three and four. He says the fat sign-on bonus is 'an inducement to make up for deferred compensation and a way to provide a decent amount of security for the move.'

Here's a look at the behind-the-scenes skullduggery leading up to the business-page splash and, for the lucky few, a payout of gigantic proportions.

The hunt for Team X

Once a bank decides to go cherry-picking, the next and often hardest task is finding the ripest fruit. The goal: a cohesive team that fulfills nearly every function for a particular client or group of clients. The team's product should be compatible with the acquiring firm's. Chemistry is key, and that's a tall order, particularly when executed in a cloak-and-dagger fashion.

Some recruiters elicit information directly from a target company using questionable tactics such as posing as a potential client over the telephone. Wealth-management recruiter Starkie, who used to collect strategic intelligence for the CIA, prefers to build an ongoing composite of companies in his sector by gathering information from candidates he interviews as part of his everyday recruiting efforts.

Conferences are another important information-gathering tool. 'Institutions are so proud of it that they'll tell us how they're structuring their sales force,' says Starkie, who also combs company websites for nuggets of competitive intelligence.

Once a target is identified, the next step is to convert a key person-the team leader or, by virtue of higher production and reputation, the de facto team leader. A meeting is held in a clandestine location. Starkie he then appeals to the person's ambitions or career goals to him to make the pitch to his or her team.

Greed is just one motivating factor. There's also the possible lure of a management role in the new company-and the opportunity to bring only their prime people with them. 'There are always a couple of bad apples on the team they wish they didn't have,' explains Starkie.

Roadblocks to fortune

Negotiating compensation with shadowy team members can be tricky. Often the people within the team don't know each other's compensation, and they're not meant to in their future firm. A recruiter can negotiate overall comp with the leader if the leader will have P&L responsibility; otherwise, each team member needs to be negotiated with confidentially.

Even if the team leader has salary information for the others, caution must be exercised to avoid running afoul of the law.

Judith A. Lockhart is an employment law partner at Carter Ledyard & Millburn LLP, a Wall Street firm whose clients include Goldman Sachs and Merrill Lynch. She warns that 'salaries of other people in the department are technically confidential information.'

Team-members jumping ship must navigate a host of other legal shoals before setting foot on promised land, such as unexpired employment contracts, noncompetes, nonsolicits and confidentiality provisions. Most seek the advice of counsel.

Whether a firm will sue or not is hard to predict. Lockhart says, 'It can depend on how much the company is hurt financially and how much it needs to protect. Sometimes these things are done almost as a deterrent to make sure other employees don't leave, too. Firms don't like to talk about their strategies because they don't want people to know; you don't want your employees to know you're never going to sue.'

Employees plotting a move should heed the following do's and don'ts:

  • Don't take anything. Lockhart says, 'There's a difference between taking the business and taking the company's confidential records. People do it-they email a database to themselves at home, or print out the entire thing. Courts don't like it at all and it's the number one reason they issue restraining orders.' Alternatively, if you contact the client from your new job and recreate the records, the company can't stop you from doing that.
  • Don't conduct the 'business of leaving' at work. Your employer will go through your email and recordings of phone conversations, if they exist, after you leave. If the evidence shows you decided to leave and take others with you, says Lockhart, 'This is a true raid.' Your old employer could sue you and your new firm for unfair competition.
  • Don't solicit clients. 'People do it all the time in the hush-hush, wink-wink way of getting a sense of how loyal their clients are,' says Lockhart. But asking for the business directly is verboten. On the other hand, after you switch companies, a simple note announcing, 'Effective today, I am at firm X,' is probably not a solicitation.
  • Do ask your new employer to cover your legal costs. Your new firm may agree-or not, out of concerns that it may come back to haunt them in the form of an interference-with-contract suit by your old employer.

Employees should also seek assurance that if they're temporarily benched by a court enforcing a noncompete, they'll still have a game to play when they're done.

Last-ditch maneuvers

Once a team announces its intention to go, a very short window of negotiations may open up. It typically lasts no longer than a day or two, because litigation must be pressed quickly to be effective. Money and the opportunity to grow are usually the biggest bartering chips. Or, a firm may bargain for time to re-establish its relationship with a client.

Starkie, for one, is dubious about the potential for healing. 'We find generally that the longevity of people accepting a counteroffer is pretty short,' he says. 'There's a perceived breach of trust and faith.'

Banks must also walk a fine line between the realities of poaching a team or having a team poached. They neither want to be seen as poaching whole teams nor trying to hold on to ones that have made up their minds to go.

One head of investment banking at a bulge bracket firm says the specter of litigation and potential long-term shared revenues on client deals is enough to turn him away from poaching whole teams. "If a headhunter calls me and says he's got a team on tap I should look at, I can't put the phone down fast enough," he says.

If the bank makes a senior hire, however, there's nothing in the rulebook that says a few juniors can't make the leap with their team leader. The HR head says, "What we can't have is a senior hire soliciting juniors who are liable to bring over their contact lists and pitchbooks and set us all up for a temporary restraining order. That said, our phone number is in the book."

While the loss of a team and a significant piece of portable business is bad news for a firm, it's not necessarily so for the colleagues left behind. Opportunities to advance can be had to fill the vacuum with plenty of clients to service staying behind. 'Not all the assets follow,' says Starkie. He estimates that at a bulge-bracket bank, a private banker would be lucky to take along 10% of his or her own business. The rest would be redistributed to former colleagues.

The transplanted group will face its own challenges besides making sure clients play ball. Says one recruiter who shies away from team-poaching, 'When you're lifting out a whole team, it usually addresses a particular critical need the client has in the short term.' The long-term fit, he says, is anyone's guess.

For more information:

https://www.clm.com

https://www.riottojones.com

https://www.leitnersarch.com

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