Taking Stock of Your Talent

Winning the war for talent requires recognizing that the value of talent is defined by the receiver more than the giver.

Without defining what it means to win, the war for talent is aimless. Hiring or training someone who fails to deliver value to stakeholders is like preparing a meal without knowing what the patron wants to eat (fast food or gourmet) or playing a sport without keeping score.

When I get my close friends a gift, I start by defining what would be meaningful to them more than what I can easily give since they ultimately define the value of my gift.

Likewise, talent wars need clear outcomes to deliver real value. It is not enough to build on strengths but to use strengths to strengthen others. It is not enough to measure the amount of training or staffing but the effect of training or staffing on key organization outcomes. It is not enough for leaders to focus on their personal successes (e.g., “I am worth $1 billion.”), but on the ways that they have helped others succeed (e.g., “I have helped create 1,000 millionaires.”). Authentic leaders who do not create value for others are narcissists, not true leaders.

Too often talent decisions in hiring, training and leadership are based on internal not external criteria.

For example, when the standard for talent is cost per hire per employee, it underrepresents the value that the talent can create for others. When training is measured by the skills attendees acquire or even the effect of those skills on the business, the focus is primarily inside the company. When leaders are measured by how much they inspire employees as measured by engagement or productivity, the internal focus limits the full effect of leadership.

The full value of talent ultimately comes from how talent choices affect those outside the organization, not just inside. In the past few years, we have argued that leaders are effective when their behaviors reflect customer promises. When a firm brand translates to a leadership brand, leaders create more value for targeted customers. We have focused on shaping talent choices (in staffing, training, rewards, communication, organization and culture) by customer expectations. Customer promises set staffing criteria, training options, compensation standards, communication protocols, organization governance and cultural definitions.

It is now time to shift talent value from internal (employee inspiration and organization strategy) to customer expectations to investor promises.

Why Investors Care About Talent

Investors have a seemingly simple goal of making money on their investment, but this goal is not easy to achieve. Increasingly, investors realize that two firms in the same industry with the same earnings may have different market valuations.

This difference comes when investors see beyond financials like cash flow to the intangibles that produce sustained earnings. These intangibles include strategy, brand, research and development, distribution and other business processes.

Talent is one of the most critical and underlying intangibles. If and when investors have more confidence in talent (from the senior leaders to employees throughout the organization) they reduce the risk of their investment and increase their confidence in future earnings.

Investors who pay attention to talent go beyond financial results and strategic intangibles to the talent choices that drive long-term success. Talent proponents who link talent choices to value created for investors work toward talent choices that build investor confidence and market valuation.

We have found that investors often recognize the value of leadership as a subset of talent, but are not sure how to track it.

So, how do investors determine if a firm has better or worse talent? How can talent managers link their work to market valuation?

Increasing Investor Confidence in Talent

First, investors and business leaders need to recognize that market value comes from intangibles such as talent. In our research we found that about 30 percent of intangibles is related to quality of leadership. Talent managers can prepare a graph of how their firm’s price-earnings (or price-to-book) ratio compares to their top competitors over a significant period of time. Talent managers can prepare this chart (often with help from colleagues in finance) to show the overall intangible value of their firm vs. competitors.

Focusing on market value of talent offers a dramatically different perspective of the importance of talent. For example, in Table 1, we show that Apple Inc.’s P/E ratio over a decade was 22 vs. an industry average of 14.6. This shows that about 50 percent (Subtract 14.6, the industry average, from 22, Apple’s average P/E ratio, and get 7.4, or 22-14.6 = 7.4. Then divide that figure 7.4 into 14.6 and get a total of 50 percent, or 7.4/14.6=50 percent) of Apple’s $750 billion market cap is based on the intangibles. If leadership, or talent, is about 30 percent of this intangible value, then the value of talent to Apple is about $110 billion, which is 30 percent of $375 billion.

Talent managers who prepare these charts communicate the value of the intangibles and talent to the business.

Second, investors need to have a way to framework to understand the quality of talent. Even when investors recognize the variance in market valuation because of talent, they often lack a rigorous way to understand and track it.

Talent managers need to prepare a simple but robust way to discuss talent with investors. Assessing talent management processes is difficult because a multitude of programs and investments have been made to attract, upgrade and retain talent. Investors need to avoid the pitfall and allure of looking at one talent process (e.g., hiring or engaging or training or succession planning) and missing the importance of the overall talent management system. When we interviewed investors, they almost uniformly agreed that people matter and that talent management processes should affect their valuation of the firm.

We have found that talent processes can be synthesized into choices about the flow of talent into the organization (sourcing new talent into the organization), through the organization (developing current talent, building commitment and preparing future successors), and out of the organization (managing retention of key performers and removing poor performers).

Third, investors need to have indicators to assess talent. These indicators might reflect overall commitment to talent such as:

• Revenue per full-time employee.
• Total labor cost (payroll, contingent and contract worker pay, and benefits) as a percentage of revenue.
• Correlations of the service profit chain (employee sentiment correlated to customer affect to financial performance.
• Firm reputation in social media.

Or the talent managers may share specific talent indicators such as:

Bringing talent in:

• How many qualified applicants per advertised position?
• How long before new employees are fully productive?

Managing talent through the organization:

• What is training and development budget per employee? As a ratio of sales?
• Track backup ratios for key leadership positions?
• Monitor employee engagement vs. competitors.

Attending to employees who leave:

• Review retention of pivotal employees.
• Examine how the firm deals with poor performers.

Finally, investors need to be informed of the organization’s talent management processes. Talent managers might prepare presentations on talent for investors which might be 10 to 15 percent of investor calls or roadshows. This might be talent managers preparing talent metrics as part of the investor calls. Or, it might be working to help investors recognize the quality of leadership within the organization.

For example, restaurant chain Buffalo Wild Wings Inc. intentionally gives investors exposure to its broader leadership team as opposed to companies more traditionally limiting exposure to the CEO, chief financial officer and investor relations professionals. It hosts an investors day where the entire leadership team plays a role in sharing direction and strategy, adds the chief operating officer to the Q-and-A portion of quarterly earnings calls, and have other C-level leaders (including the chief human resources officer) join the CFO on investor visits to show leadership depth.

Alere Inc., a global health care diagnostics company, recently worked with investors to show the quality of leadership. In its recent “buy” recommendation, investors looked at the quality of leadership. Here are some quotes from their recommendation:

• “We recently met with Alere’s management and came away with a greater sense of appreciation for the company’s deep commitment to quality, beginning with its people.”
• The company “invests in world-class people. … Alere has made a large number of important hires over the past 12 months to ensure the best possible people are managing various divisions. … Management team is ‘full, at the top of the house,’ still filling out the team at the VP level. We came out of our recent meeting encouraged with the company’s commitment to quality, particularly to people.”
• “We continue to recommend investors accumulate shares of Alere given our expectations for multiple expansion as management executes on its core initiatives.”

These cases illustrate that talent managers can actively participate in investor conversations to increase investor confidence in and awareness of talent.

Investors who want asymmetrical data on a firm’s future performance will come to rely more on assessments of talent and leadership. Talent managers who want to win the war for talent will increasingly focus on how talent can be understood and tracked by investors.

Dave Ulrich is the Rensis Likert professor at Ross School of Business at the University of Michigan and partner with the RBL Group. Comment below or email editors@workforce.com. Follow Workforce on Twitter at @workforcenews.