Yahoo!'s Talent Keeps Bailing

The departure of several senior execs means even more trouble.
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If ever there was a time that Yahoo! (YHOO) needs to rally the troops, it's now.

The company's stock price is off 33% for the year at $27.40, and rival

Google

(GOOG) - Get Report

is expanding its lead in the online advertising market even as it encroaches on Yahoo! strongholds such as social media (blogs, message boards, podcasts) and mobile technology.

But instead, the world's most visited Web destination is seeing even more of its admirals jump ship.

Over the weekend, media blog paidcontent.org reported Yahoo!'s confirmation that senior vice president Bill Demas of Yahoo!'s Publisher Network Group, will depart at the end of November.

The blog also reported the impending departure of Will Johnson, who leads the division's beta program, which is intended to help the company close the online ad gap on search leader Google. A Yahoo! representative said both departures are voluntary.

And while large rivals such as

Microsoft

(MSFT) - Get Report

,

Time Warner's

(TWX)

AOL division, and

InterActiveCorp

(IACI)

, along with Google, continue to turn up the heat, Yahoo! is now losing some of its best and brightest to ambitious upstarts.

Demas is leaving "to pursue his goal of leading a small company or venture," Yahoo! said in a statement.

In August, the company lost its vice president of shopping to a start-up, and the vice president of its developer network went to lead another start-up earlier in the year. Yahoo!, a poster child for the nimble Internet start-up during the last tech boom, now seems sluggish in the midst of Silicon Valley's most recent resurgence.

"Being a start-up guy, I couldn't handle the glacial pace of Yahoo! technology and product development," said another former Yahoo! vice president who left the company earlier this year, also for a start-up.

Start Your Engineers

"An interesting topic would be to look into the difference in engineering horsepower between Google and Yahoo! -- not just in terms of the number of soldiers, but also the quality of commanding officers. Google has innovation in its DNA, while Yahoo!'s DNA is rooted in media and advertising," the ex-VP said.

As Yahoo!'s prospects remain murky, the company is seeing an increasing amount of competition for talent from innovative start-ups, many of which are benefiting from the rise of a new generation of Internet technologies and eager venture capitalists willing to back them.

Venture capitalists invested a healthy $6.2 billion in the third quarter of 2006, making it the third straight quarter to see a strong funding environment, according to research from the National Venture Capital Association.

Seed and early-stage deals in the telecom, media and entertainment industries continued to post strong numbers, meaning there are a growing number of potential homes for Yahoo! alumni.

"Yahoo! is a mature company now, and they are trying to set new goals and new directions," says Robin Reed, a principal at Reed Shay & Co., an executive recruitment firm that focuses on technology start-ups.

"With the tremendous investments being rolled out in the VC community, many people are leaving to join entrepreneurial companies and start their own," Reed says.

Along with the renaissance in entrepreneurial activity, a hiring binge by Google -- the company has more than 200 recruiters -- is reigniting talent wars in Silicon Valley, says Reed.

And while Yahoo!'s decision to embrace its media roots may be sound from a strategic standpoint, it leaves the company more vulnerable when going head to head for top talent that wants to work on the most complex engineering problems.

Finally, with the emergence of popular professional-networking technologies such as

LinkedIn

, it is easer to learn about new opportunities in greener pastures than ever before.

These developments make the recent stalls at Yahoo!, which announced a

weaker-than-expected third quarter and softened guidance, all the more perilous.

If things get worse, Yahoo!'s talent may begin to see its pedigree from the company as more valuable than its future there. And "Yahoo! senior management will get picked up in a nanosecond if they decide to leave," says Victoria James, an executive recruiter who focuses on Internet companies.

So what is Yahoo! to do? Simply upping the amount a company is willing to pay to keep employees on board may seem like the most straightforward route. But that doesn't deliver results, according to recruiting experts.

A recent study found that while 50% of employees took a higher counteroffer when they said they had plans to leave a company, 93% of them still left the company in 18 months, says Martha Josephson, a partner at executive recruiter Egon Zehnder International.

Instead, Josephson says the key factor in determining whether top talent stays on board is whether the CEO seems to have a plan or not. "If they have articulated the plan for how to turn things around well, and it's a solid plan, then people won't pay so much attention to Wall Street," she says. "But they need to see where the company is headed."

CEO Terry Semel attempted to do just that. During the company's last conference call, he outlined a plan in which the company's highly anticipated Project Panama platform helps close the gap with Google in the bread-and-butter online advertising market.

Meanwhile, Yahoo! will use its huge global user base to try to charge into emerging categories such as social search and video.

But despite the calm tone, management trip-ups continue to raise the question of how solid the company's game plan is. Yahoo!'s contention that its weak results were part of a bigger industry slowdown proved to be off the mark when Google blew away its quarterly numbers.

Such missteps will make investors outside and employees inside more skeptical about Yahoo!'s ambitious plan to put its house back in order.