Capital vs. Talent? Strategies for Maximizing the Value of Talent

Viewpoint: October 22, 2003

It came out in the summer, so you may have missed it.  The article is Capital Versus Talent: The Battle That’s Reshaping Businessand it appeared in the July 2003 issue of Harvard Business Review.  I have very mixed feelings about the substance of the article, but I urge everyone to read it because it highlights one of many growing pressures on corporations. Executives who grapple with the implications of this article will be in a better position to create economic value in the years ahead.

In a nutshell, the article asserts that the growing importance of knowledge capital leads to a conflict between investors and talent for capture of economic value. In the early part of the twentieth century, the defining conflict was between labor and capital. That battle was won by capital.  Now capital is facing another strong adversary – talent. The authors use the example of CEO compensation as one symptom of the growing demands of talent. CEO compensation declined by 33% between 1960 and 1980, but then doubled between 1980 and 1990 and quadrupled again between 1990 and 2000. Sure, it declined by 16% in 2001 and an additional 33% in 2002, but that’s because some of the compensation is tied to corporate performance – and it still leaves CEO’s with more than four times higher compensation than they received in 1980.

Now, there are lots of problems with this article. Labels are one. Labor is apparently different from talent, but the distinction is never really made clear. Only a few examples of talent are given, primarily focusing on CEO’s, artistic talent, consulting talent and investment talent. Frankly, the focus on CEO’s is a bit problematic, given many other factors driving CEO compensation, including flawed governance structures and related barriers to hostile takeovers. The notion of a fundamental conflict between capital and talent is even more problematic, as I discuss below.

Nevertheless, the article does draw attention to a growing challenge (and opportunity) for corporations and investors. Many factors converge to increase the negotiating power of talent.  The authors of the HBR article cite the growing importance of knowledge assets relative to capital assets in creating economic value. They also discuss the evolution of sophisticated financing institutions to reward entrepreneurial talent. Even more fundamental is the intensifying competitive pressure created by technology forces and regulatory forces that increase the power of customers and reduce barriers to entry. Anyone who can demonstrate a consistent track record of value creation in this environment will be richly rewarded. Profitability will be even more squeezed as talent captures more of the value created.

How should investors and executives respond to this challenge?  First, they need to adopt a new mindset, then they need to use this challenge as a catalyst to rethink their approach to the businesses they are in.  Like many other things in business, the key is to adopt a different lens to view the same information.  Rather than viewing the growing bargaining power of talent as a challenge, why not view it as an opportunity?  What does talent need to remain challenged and motivated?  It needs opportunities for accelerated development, especially in the form of business growth.  Growth is great for talent. It increases the value that talent can add to the business, thereby increasing the potential for financial reward.  It offers more potential for advancement within the organization. It accelerates skill-building in a variety of ways – it pushes talent to develop new skills, it exposes talent to a broader range of experiences in a short time, it gives talent an opportunity to work with talent coming from the outside with an even broader range of experiences since growing companies need to expand recruitment.

But here’s the twist: business growth is also great for investors.  Companies can do only so much to enhance profitability through cost reduction.  The real upside comes from growth. Rather than viewing this as a zero sum game where capital and talent fight over their share of a fixed pot, why not view this as an opportunity to create a positive sum game where both parties benefit from an increasing pot of economic value? Capital and talent both have a common need: greater business growth. Their interests are in fact aligned. If there is an enemy in this story, it is mid and senior level managers who have become comfortable with their current compensation and who view growth as threatening or disruptive.

Rather than capital vs. talent, we should be talking about the new alliance between capital and talent.  Rather than the war for talent, we should be talking about the war led by talent, and supported by investors, for more robust growth platforms.

OK, so that is the mindset shift.  With this mindset, what can executives do to generate more value from and for talent? Let’s briefly run through four related initiatives. Together, these can provide a platform to reward talent and investors.

– Decide what business you are in.  My article “Unbundling the Corporation” (also in Harvard Business Review) laid out the case that most companies today are an unnatural bundle of three very different kinds of businesses – customer relationship businesses, infrastructure management businesses and product innovation and commercialization businesses.  Executives are making difficult choices to focus on only one of these three businesses and to rely on other companies for complementary resources. These choices are essential to provide more clarity and focus regarding the specific type of talent that is most important for economic value creation. Talent requires many things to be satisfied.  Compensation is just one element of an overall reward package.  Recognition and compatible cultures are also critical. Each of the three businesses mentioned earlier have very different cultures and ways of providing recognition. Companies that try to remain in all three businesses will be far less effective in rewarding talent.
– Leverage other people’s talent as much as possible.  Bill Joy, one of the founders of Sun, once said, “there are always more smart people outside your company than within it.” Your challenge is to identify these smart people and access their talent, not necessarily to attract and recruit the talent. Winning companies will figure out how to develop privileged access with appropriate world-class talent, wherever it resides.  How to do this? We all know about business alliances, but more traditional forms of alliances often tend to be unwieldy and restricted in scope. I have written about process networks and business webs extensively elsewhere (see especially, “Leveraged Growth: Expanding Sales Without Sacrificing Profits”and “Spider versus Spider” as well as the relevant sections of my books Out of the Box and Net Worth ) – these can be very effective ways to amplify access to diverse talent. Outsourcing and offshoring (while often linked, these are not necessarily synonymous) become powerful options to access talent. Smart executives are realizing that this is not just about accessing cheaper talent, but that it also provides a way to access world-class talent that simply would not be available otherwise. We are witnessing the globalization of talent markets on an unprecedented scale and few companies are skillful at exploiting these globalization trends. More mundane devices like user groups and alumni groups offer interesting ways to build broader talent networks.
– Become more skilled at talent arbitrage.  What do I mean by talent arbitrage?  It is the process of moving talent from low growth business environments to high growth business environments.  This gives talent more headroom for value creation. As discussed earlier, growth environments are inherently more rewarding for talent, but they also provide more opportunity for value creation for the company.  All companies have a portfolio of product-market segments with varying rates of growth.  Companies need to develop systematic programs to shift their most talented employees into higher growth segments. Since these segments are often smaller parts of the overall business, companies are often reluctant to assign their most talented employees to these segments.  Of course, not all talent can be redeployed against growth segments.  The more mature core parts of the business also need talent to help extract more value and, ideally, to help reposition these core areas for higher growth.  In these cases, companies should be careful to develop appropriate incentive systems to reward talent.  One of the greatest threats to more established companies is the talent arbitrage opportunity available to new entrants.  These new entrants, enjoying substantial growth in mature markets through share gain, are often able to lure talent from mature companies by offering them more opportunity for value creation and talent development.
– Become more skilled at talent development.  Now, this may sound like a truism. Of course, all companies focus on talent development. But they may need to change their approach.  First, let’s be more specific about talent.  There are at least two ways to think about talent in companies.  We are all familiar with “fast track” development programs for high potential executives. These programs focus on people with potential to play many different roles and ultimately take on senior general management roles in the company. But there is another form of talent that is much less systematically managed or developed.  This is the talent required to perform pivotal jobs.  What are pivotal jobs?  These are the roles within any company that have a disproportionate impact on the economic levers required for value creation.  For example, in airlines, these might be the people who focus on pricing and utilization optimization to generate as much revenue as possible per seat mile flown.  In mail order companies, they could be the people who focus on cost-effective customer acquisition and retention strategies.  Ask any HR executive to identify the pivotal jobs in their company.  Chances are, they will stumble and not have a clearly thought through answer.  Yet, this is a pre-requisite to creating effective programs to develop this talent.  Here’s another way that talent development will have to change: companies will need to play the role of talent agent, crossing the table to focus on the needs of the talent, rather than focusing on the needs of the company. Among other things, this means HR needs to view itself as a champion of talent’s interests, even if that may conflict with the near-term interests of the company. If HR departments can’t make this transition, companies will find they must increasingly deal with external talent agents who will work with corporate talent in much the same way that Hollywood agents represent film talent.

In an economic environment that is still precarious, all this talk about the increasing bargaining power of talent may seem a bit far-fetched.  Unemployment is still high and many people feel happy to simply have a job.  But all people are not created equal, at least not in labor markets.  Talent, those who have a disproportionate impact on value creation and with a track record to prove it, will increasingly call the shots.This is not bad news, except for poorly performing companies.  Companies will need to leverage assets (especially human capital) more effectively and to identify and pursue new sources of growth more aggressively.  We will all – as talent, as customers and as shareholders in companies – benefit from the rewards created by higher levels of corporate performance.