People Business » The casualties of the war for talent

The casualties of the war for talent

The hiring of star players can have a negative impact on any organisation, says Fabrizio Ferraro, professor of strategic management at IESE Business School, University of Navarra.

As the job markets tightens, and technological disruption and competitive threats challenge corporate performance, we are witnessing a revival of the war for talent, a term first introduced by McKinsey in 1997 to refer to the fierce competition for the best and brightest employees. As a result, ten years after the financial crisis, investment bankers, hedge fund traders and private equity professionals are back reaping enormous financial benefits from their talent.

In the entertainment industry, very few successful movie actors and soccer players such as Lionel Messi make most of the money, while a long tail of performers make living wages. But even beyond Wall St and Hollywood, talent wars ignite around novel technologies, such as AI, where recently minted PhDs can command salaries of up to $500,000.

There are very good reasons for companies to fiercely compete for the best people, especially in industries where exceptional individual performance might make all the difference between a successful trade/movie/game, and a losing one. More broadly, it is a positive sign that companies are investing more in human capital and innovative activities, rather than in tangible capital, or just giving money back to shareholders. Yet, unfortunately, there are good reasons to believe that in most cases this war does not deliver in terms of organisational performance, and leaves many casualties on the field.

Economists and management scholars have studied the positive and negative consequences of hiring stars in organizations. Beyond the obvious benefit of “buying” someone’s individual performance, the key question is whether star workers generate any positive spillover effect on the rest of the organisation. Given the difficulties of collecting data inside corporations, much of this work has been done on scientists (where individual and organizational research productivity can be easily measured).

Even in this context, the evidence is contradictory, as some studies show evidence of spillover effects while others do not. For instance, a study of star scientist deaths shows that following the death of a star, a co-author’s performance decreases by 5% to 10%. In a series of studies of scientists leaving Nazi Germany, others have found no evidence of spillover effects. Thus, even in carefully controlled studies of scientists, the jury is still out on whether hiring star employees has positive consequences on other scientists.

Together with Matteo Prato, a colleague from University of Lugano, we set out to address this question in the context of securities analysts.  We wanted to test whether the hiring of star performers affects the performance of incumbent analysts. In this context, analysts are recognized as stars by the Institutional Investors’ annual rankings, and banks compete to get the star analysts, in order to improve the performance of their research group, and attract more trading activity. This setting also enables us to control for any other individual-level difference, and isolate the effect of the hiring event.

Stellar performers?

In our study, published in Organization Science, we studied 11,712 unique analysts, 696 organizations, and 3,124 hiring events, from 1996 until 2007, and found that on average the incumbent analysts reduced their performance by almost 4% in the quarters after the hiring of the star analyst. Only incumbents who had been already recognized as star analysts themselves were able to keep up their performance level.

What explains these results? We believe that internal rivalry and status competition is the most likely cause of our results. As companies hire star employees, they are likely to lure them with ample resources and attention. Too often, these resources are syphoned off existing employees. This generates a negative dynamic whereby incumbents feel they are worst off because of the new hires.

What should firms do? Give up on talent?  Absolutely no!  Stars can generate positive spillovers, but it won’t just happen by hiring them. Leaders should first set out adequate resources so that the new star will not be perceived as stealing resources from the worker bees. This means that hiring stars only makes sense if the global investment in human capital is increasing, and not if it is a mere redistribution.

Second, leaders should ensure that stars will be hired, evaluated, and rewarded not only on the basis of their individual performance, but also based on their potential and performance as mentors.  Ultimately, what the organisation needs is not just individual stars, but team players and coaches, while we still celebrate and fight for the individual performers.

Fabrizio Ferraro is Professor of Strategic Management at IESE Business School. He received his PhD in Management from Stanford University. His current research explores the emergence of responsible and impact investing in the financial sector.

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