December 12, 2014

Lego businessman

A company's most important asset - the creative power of its workers. Credit: Wiredforlego / Flickr Creative Commons

Is the Talent Economy Working?
 
If you wanted to become a millionaire before 1960, your best bet was to gain control over a resource like timber or oil and hire lots of laborers to help you exploit it.

Look around today, and the world is full of decidedly fewer timber barons.

Starting in the 1960s, the U.S. economy underwent a major transformation, argues Roger Martin, a management expert and author of the article “The Rise and Likely Fall of the Talent Economy.” Around that time, companies found they could gain a competitive advantage by hiring highly talented people to invent new products and market them to consumers. The Proctor & Gambles and the GEs rose to the top, while the Bethlehem Steels and Sinclair Oils began to falter.
 
“Talent started to say, ‘hey, it’s not the capital, it’s not the people with the money bags, and it’s not the people with the natural resources – it’s me,” says Martin.
 
Zero Sum Game
 
To a point, the growth of the knowledge economy has been a good thing for innovation. Leaders of tech companies get paid a lot of money because they create products that people find useful and are willing to pay for. And when their companies become successful, they hire more people and grow the economy.

“It’s a positive sum game,” says Martin.
 
But that isn’t the case across the board. Hedge fund managers, for example, make their money from trading public securities. “It’s a zero sum game, which doesn’t really create much societal value,” say Martin. Still, "it’s definitely the industry that is creating the most personal wealth in America."
 
Compensation Problems
 
Between 1978 and 2013, the average compensation for CEOs at the biggest 350 companies in the U.S. increased by 937 percent. That whopping gain didn’t happen because CEOs are more talented today than they used to be – it’s because we try to incentivize people in much the same way we did before the 1960s transformation.
 
“I think it’s a huge fallacy that these CEOs are highly motivated by extra compensation,” says Martin. “All the CEOs I work with say, ‘they’re paying me a ridiculous amount.’”
 
If you give someone a physical task, like moving rocks, and offer to pay them more for moving more rocks, they’ll do it. But if the person you’re dealing with is doing a mental task rather than a physical one, more money actually serves as a disincentive and hinders problem-solving. “It freaks you out,” explains Martin.
 
“The value of monetary incentive compensation is vastly, vastly overestimated,” he believes. “If you shrunk in half the CEO compensation in America, there would be absolutely no diminution of the quality of management.”
 
Plus, he adds, “they wouldn’t complain.”
 
We’re not so sure about that last bit, but hey, it’s worth a shot.

talent economy, Business, strategy, Roger Martin

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