Are There Stars in Banking -- or Anywhere Else?

Last Updated Aug 5, 2009 7:01 PM EDT

The latest disclosures about the enormous salaries paid to at least some financial sector employees even as their firms performed dismally have produced public outrage. The companies' response is that they have to pay well in order to attract (and retain) talent. But the idea that organizational performance reflects talent that is a property of individuals and thus walks out the door when they do is just plain wrong, even in investment banking. Harvard Business School professor Boris Groysberg was curious as to whether a company could gain some competitive advantage by hiring outside talent. He chose a particular setting, finance, and a particular job, securities analyst, that had the following properties: people believed there were large differences in individual ability, performance could be objectively assessed (by analyst rankings), and movement across firms occurred on a regular basis. Grosyberg studied 1,052 stock analysts who worked for 28 U.S. investment banks over the period 1988 through 1996. He found that when a company hires a star away from another firm, the star's performance falls (46 percent of the research analysts did poorly in the year they switched jobs and their performance remained lower even after five years), there is a decline in the performance of the group the star joins, the market value of the company hiring the star falls, and the star doesn't stay with the new employer for very long. Grosyberg concluded that hiring stars didn't do much for the firms' or the stars performance, and that everyone would be better off by growing talent inside the firm. (Groysberg has more to say about the portability of talent in "The Risky Business of Hiring Stars" and "The Effect of Colleague Quality on Top Performance."

Although Groysberg's results may initially seem surprising, that is only because we have succumbed to the idea that how people perform depends on some stable individual characteristics like talent or innate ability rather than where they work, the technology and systems available to them, the quality of their colleagues, and the ability of their leaders. This was precisely the point W. Edwards Deming and his colleagues in the quality movement made decades ago when they told companies to stop blaming (or for that matter, rewarding) people for outcomes over which the individuals had little control. And it is an idea demonstrated in numerous studies of a variety of presumably individualistic jobs.

For instance, evidence shows that individual professors' research productivity depends in part on where they work. And why not? Teaching loads, laboratory equipment and other facilities, and the capabilities of collaborators affect the success of individual's research efforts. In baseball, as Cornell industrial relations professor Lawrence Kahn demonstrated, managers and teams affect the performance of baseball players. On some teams with great managers, players do better than their long-run average performance, while on others run by people with less managerial skill, they do worse than their career records would predict. And Michael Lewis's book, Moneyball, shows that player ability, at least as reflected in their salaries, is far from perfectly correlated with team performance. What's true for the relatively individualistic occupations of securities analyst, professor, and baseball player is even more likely to hold for typical organizational jobs where interdependence among people in performing tasks is even higher.

The lessons: chasing talent doesn't work and just costs the companies doing the chasing a lot of wasted money. There are no short cuts to efforts to build systems that develop the full potential of existing employees and cultures which provide the collaboration, mentoring, and learning opportunities that help everyone do better. And there is another lesson in this sorry tale: the banks and securities firms who defend the practice of chasing stars as a justification for outrageous salaries are either being disingenuous or they really don't fully understand what makes companies in their industry successful and the empirical data on the ineffectiveness of a "war for talent" strategy. Given their financial performance, the latter -- pervasive ignorance of the determinants of success -- is a real possibility.
  • Jeffrey Pfeffer



Market Data

Market News

Stock Watchlist