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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.

By Jena McGregor

 |  October 11, 2010; 11:12 AM ET |  Category:  Corporate leadership , Leadership advice , Must reads Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati  
Previous: Leaders need to 'pass' on the sports cliches | Next: Wall Street's record-breaking paystubs: Pay for performance? Really?

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If Wall Street is worried about losing “the best and the brightest” if overblown salaries and bonuses are not awarded to their traders and package molders then what happened when the entire industry tanked? The fallacy is that these family-connected, formulaic, pampered MBAs are necessary. They are not. They manipulate funds in a way that ensures their own success and that of a few score of billionaire investors and industrial clients, leaving the average investor at the mercy of the schlock investment advisors and brokers that know little about the market other than following some meaningless geometric model on when to buy and when to sell. Investors should be allowed to invest in, trade or sell stocks and earn a commission for their efforts when they do. In other words, take the commissions out of the hands of the brokers and put it in the hands of the actual investor. No front-end or back-end loading, no percentage of the investors total fund amount to be given to the broker/advisor! Just get rid of the whole concept of brokers. Let the market (public) determine where they want to invest and let them execute it…not the brokers. Since the brokers now distribute 32% of their revenues to their employees, then let the industries pay the 32% directly to their investors, plus the normal 15% dividend, plus the 1.5% normal broker fee (normally charged to the investor) . Do this and you will find some serious investments going on.

Posted by: tempestite | October 12, 2010 2:25 PM

"As an earlier poster said, "duh". Doesn't take a genius to realize that this happens QUITE OFTEN, that people are paid more than they produce. "

God knows if that wasn't the case, the WP wouldn't regularly issue buyouts to its staff.

Posted by: chucklebuck | October 12, 2010 11:21 AM

"His evidence overwhelmingly finds that "hiring stars does not work well. ... The star's performance can suffer in the wake of the move."

Of course that can happen.

" In addition, the much-publicized outside hire can cause resentment in the department, with accompanying breakdown in morale, teamwork, and communication. "

Likewise that *can* happen, if the move isn't managed well. It can happen any time there is a breakdown between results and compensation, or when egos rise and clash.

This is a problem in EVERY organization.

"Finally, the firm can find that it paid more for its new star than is justified by the results." Indeed."

As an earlier poster said, "duh". Doesn't take a genius to realize that this happens QUITE OFTEN, that people are paid more than they produce.

How can we have a bank-bailout and have anyone not realize that.

You can pick and choose among the possible reasons that we had a bank bailout or admit that probably every possible reason played a role to some degree.

Posted by: chucklebuck | October 12, 2010 11:20 AM

...still what consistently amazes me is the attitude of the WaPo that if WS or other industries would just read more of what they have to say that they would all function so much better.

Look: you're a journalist hack. You're not even writing at a top-flight paper. Get a grip on yourself.

Posted by: chucklebuck | October 12, 2010 11:15 AM

"Most people, whatever we may believe about individual performance, succeed thanks to the people and environment around them."

That is of course true to some degree as few people work in a vacuum, but the answer is not to stop paying a premium for their services, but to poach their whole team, or the lion's share of it.

Otherwise you promote the fallacy that a star player can only do well in the organization in which he is a star player. That's not the case. They will not necessarily do well in *any* other organization but certainly their current one is not the *only* organization in which they would do well. And they would face increased competition anyway.

Posted by: chucklebuck | October 12, 2010 11:14 AM

It's about responsible stewardship of a company for all of the stakeholders. Most of these overpaid superstars are not working with all of the stakeholders' best interests at heart. Eliminate the network that makes the abuse possible and we can be sure that the boards of these corporations are run to the benefit of the stockholders, employees and public; not the anointed few.

Posted by: JenAZ | October 12, 2010 10:51 AM

It's been years since I worked in position classification for the government, but at that time the salary of a person with supervisory or managerial responsibilities was tied to the salaries of those supervised or managed. This was a very effective upper limit; it made promotion accessible and kept salaries from becoming obscene.

Posted by: jlhare1 | October 12, 2010 9:21 AM

Warren Buffet speculated a few years back that you could buy really competent CEOs for about $3million. That might need some adjustment for inflation, but not much.

Imagine working in a system where you get to hire the people who decide your salary and benefits and are also people for whom you fix their compensation. Think your salary would not rise rapidly? Mine would!

Until we reform corporate governance in a way that puts meaningful oversite of compensation in place, corporate managers will continue to pay themselves exorbitant salaries and give themselves stock option that have transferred 10% of the value of our corporations into their personal accounts. Becoming a CEO these days is to hit the lottery every year.

Posted by: mgferrebee | October 12, 2010 8:45 AM

I was thinking maybe a salary cap for financial institutions-like we have for professional sports-would be a useful limit to the "talent" feeding frenzy. Maybe 90% of the government bailout for the prior 3 years....or 2x the winnings of a designated poker professional.

Posted by: sailhoward | October 12, 2010 6:54 AM

There is an additional reason that financial superstars don't continue to do well, their luck ran out. They may have become stars simply by being in the right place at the right time; they were initialy just lucky. With many, many smart people all working with the same imformation the best decision will never be obvious no matter how smart you are. Imagine a thousand people who all make random decisions. Due to the nature of probability some will do very well and become rich stars and others will do poorly and be fired. But there may not be that much difference in their abilities.

Posted by: ThomasW1 | October 12, 2010 4:50 AM

We in the real world have a technical term for this sort of realization: Duh!


Posted by: robert17 | October 12, 2010 3:31 AM

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