Paying top dollar to snag a star performer? Big mistake
When will they ever learn? In a story in The Wall Street Journal today, major banks and investment houses are bemoaning the fact that--gasp!--they may actually be paying people too much. Some, such as Wells Fargo and UBS, are so frustrated by their new recruits that they're trying to recoup their losses, the Journal reports.
With trading desks and mortgage units imploding, the banks' brokerage arms looked relatively strong in recent years. As a result, executives plowed money into recruiting financial adviser superstars. The problem? Many of them (surprise!) didn't stick around long, despite those lucrative signing bonuses, or failed to bring in the kind of profits their new employers expected.
The banks could have saved themselves a lot of trouble by reading a fantastic recent book by Harvard Business School professor Boris Groysberg. In Chasing Stars: The myth of talent and the portability of performance, Groysberg shares his research studying the careers of more than a thousand star Wall Street analysts and conducting more than 200 interviews. His important finding: stars who switch firms fall fast, suffering what he calls "an immediate and lasting decline in performance."
Groysberg's book spells out, in convincing detail, why so many leaders are wrong to place all their chips on poaching star talent from other companies. In a knowledge economy, many leaders believe the best way to succeed is to have the best people--and that the best way to get them is to hire them away from competitors. While the first part may be true, Groysberg successfully argues that the latter most definitely is not.
Rather, Groysberg argues, most people perform well because of their firm's resources and culture and the talented analyst networks and colleagues within their firm, not in spite of it. As a result, no matter how talented people may be, when they are plopped into new settings where they may not have the same support or resources, they're actually quite likely to fail.
Bank executives would only have had to read a few passages from Groysberg's book to save themselves millions. The first page of the introduction, in fact, reads like it could have been taken from today's Journal story: "When companies do find first-rate talent, they're often willing to offer those stars huge salaries, signing bonuses, stock options--in short, whatever it takes." Just a few chapters later, Groysberg reveals the downsides of doing so. His evidence overwhelmingly finds that "hiring stars does not work well. ... The star's performance can suffer in the wake of the move. In addition, the much-publicized outside hire can cause resentment in the department, with accompanying breakdown in morale, teamwork, and communication. Finally, the firm can find that it paid more for its new star than is justified by the results." Indeed.
The research departments of investment banks provided "a near ideal real-world laboratory" for Groysberg's portability studies, but brokers would be a close second. Groysberg picked analysts as his subjects for the standardized ranking in Institutional Investor; Barron's produces a similar list that assesses financial advisers' performance. It is not hard to track when top brokers jump ship for other firms--the news often makes both waves and headlines in the industry. And like analysts, many top brokers are based in New York, which eliminates "complicating factors, like family upheaval," Groysberg notes, in assessing performance during a job change.
But financial advisers aren't the only applicable talent market to Groysberg's findings. Think athletics, where star recruits like Albert Haynesworth can fall flat, or where teams of stars don't always succeed. The same can happen with top sales executives or stellar managers of any stripe. Most people, whatever we may believe about individual performance, succeed thanks to the people and environment around them. Groysberg demonstrates that persuasively.
For years, companies--and Wall Street, especially--have been able to explain away outsized pay by saying it was the only way to attract the people it needed to perform at its best. Groysberg punches a big hole in that argument. Too bad banks like Wells Fargo and UBS didn't know it was there.
October 11, 2010; 11:12 AM ET |
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