Articles from the New Yorker
The Talent Myth
July 22, 2002
DEPT. OF HUMAN RESOURCES
Are smart people overrated?
1.
Five years ago, several executives at McKinsey & Company,
This "talent mind-set" is the new orthodoxy of American
management. It is the intellectual justification for why such a high premium is
placed on degrees from first-tier business schools, and why the compensation
packages for top executives have become so lavish. In the modern corporation,
the system is considered only as strong as its stars, and, in the past few
years, this message has been preached by consultants and management gurus all
over the world. None, however, have spread the word quite so ardently as
McKinsey, and, of all its clients, one firm took the talent mind-set closest to
heart. It was a company where McKinsey conducted twenty separate projects,
where McKinsey's billings topped ten million dollars a year, where a McKinsey
director regularly attended board meetings, and where the C.E.O. himself was a
former McKinsey partner. The company, of course, was Enron.
The Enron scandal is now almost a year old. The reputations of
Jeffrey Skilling and Kenneth Lay, the company's two top executives, have been
destroyed. Arthur Andersen, Enron's auditor, has been driven out of business,
and now investigators have turned their attention to Enron's investment
bankers. The one Enron partner that has escaped largely unscathed is McKinsey,
which is odd, given that it essentially created the blueprint for the Enron
culture. Enron was the ultimate "talent" company. When Skilling
started the corporate division known as Enron Capital and Trade, in 1990, he
"decided to bring in a steady stream of the very best college and M.B.A.
graduates he could find to stock the company with talent," Michaels,
Handfield-Jones, and Axelrod tell us. During the nineties, Enron was bringing
in two hundred and fifty newly minted M.B.A.s a year. "We had these things
called Super Saturdays," one former Enron manager recalls. "I'd
interview some of these guys who were fresh out of Harvard, and these kids
could blow me out of the water. They knew things I'd never heard of." Once
at Enron, the top performers were rewarded inordinately, and promoted without
regard for seniority or experience. Enron was a star system. "The only
thing that differentiates Enron from our competitors is our people, our
talent," Lay, Enron's former chairman and C.E.O., told the McKinsey consultants
when they came to the company's headquarters, in
The management of Enron, in other words, did exactly what the
consultants at McKinsey said that companies ought to do in order to succeed in
the modern economy. It hired and rewarded the very best and the very
brightest--and it is now in bankruptcy. The reasons for its collapse are
complex, needless to say. But what if Enron failed not in spite of its talent
mind-set but because of it? What if smart people are overrated?
2.
At the heart of the McKinsey vision is a process that the War for
Talent advocates refer to as "differentiation and affirmation."
Employers, they argue, need to sit down once or twice a year and hold a
"candid, probing, no-holds-barred debate about each individual,"
sorting employees into A, B, and C groups. The A's must be challenged and
disproportionately rewarded. The B's need to be encouraged and affirmed. The
C's need to shape up or be shipped out. Enron followed this advice almost to
the letter, setting up internal Performance Review Committees. The members got
together twice a year, and graded each person in their section on ten separate
criteria, using a scale of one to five. The process was called "rank and
yank." Those graded at the top of their unit received bonuses two-thirds
higher than those in the next thirty per cent; those who ranked at the bottom
received no bonuses and no extra stock options--and in some cases were pushed
out.
How should that ranking be done? Unfortunately, the McKinsey
consultants spend very little time discussing the matter. One possibility is
simply to hire and reward the smartest people. But the link between, say, I.Q.
and job performance is distinctly underwhelming. On a scale where 0.1 or below
means virtually no correlation and 0.7 or above implies a strong correlation
(your height, for example, has a 0.7 correlation with your parents' height),
the correlation between I.Q. and occupational success is between 0.2 and 0.3.
"What I.Q. doesn't pick up is effectiveness at common-sense sorts of
things, especially working with people," Richard Wagner, a psychologist at
Wagner and Robert Sternberg, a psychologist at
You have just been promoted to head of an important department
in your organization. The previous head has been transferred to an equivalent
position in a less important department. Your understanding of the reason for
the move is that the performance of the department as a whole has been
mediocre. There have not been any glaring deficiencies, just a perception of
the department as so-so rather than very good. Your charge is to shape up the
department. Results are expected quickly. Rate the quality of the following
strategies for succeeding at your new position.
a) Always delegate to the most junior person who can be trusted
with the task.
b) Give your superiors frequent progress reports.
c) Announce a major reorganization of the department that includes getting rid
of whomever you believe to be "dead wood."
d) Concentrate more on your people than on the tasks to be done.
e) Make people feel completely responsible for their work.
Wagner finds that how well people do on a test like this predicts
how well they will do in the workplace: good managers pick (b) and (e); bad
managers tend to pick (c). Yet there's no clear connection between such tacit knowledge
and other forms of knowledge and experience. The process of assessing ability
in the workplace is a lot messier than it appears.
An employer really wants to assess not potential but performance.
Yet that's just as tricky. In "The War for Talent," the authors talk
about how the Royal Air Force used the A, B, and C ranking system for its
pilots during the Battle of Britain. But ranking fighter pilots--for whom there
are a limited and relatively objective set of performance criteria (enemy
kills, for example, and the ability to get their formations safely home)--is a
lot easier than assessing how the manager of a new unit is doing at, say,
marketing or business development. And whom do you ask to rate the manager's
performance? Studies show that there is very little correlation between how
someone's peers rate him and how his boss rates him. The only rigorous way to
assess performance, according to human-resources specialists, is to use
criteria that are as specific as possible. Managers are supposed to take
detailed notes on their employees throughout the year, in order to remove
subjective personal reactions from the process of assessment. You can grade
someone's performance only if you know their performance. And, in the
freewheeling culture of Enron, this was all but impossible. People deemed
"talented" were constantly being pushed into new jobs and given new
challenges. Annual turnover from promotions was close to twenty per cent. Lynda
Clemmons, the so-called "weather babe" who started Enron's weather
derivatives business, jumped, in seven quick years, from trader to associate to
manager to director and, finally, to head of her own business unit. How do you
evaluate someone's performance in a system where no one is in a job long enough
to allow such evaluation?
The answer is that you end up doing performance evaluations that
aren't based on performance. Among the many glowing books about Enron written
before its fall was the best-seller "Leading the Revolution," by the
management consultant Gary Hamel, which tells the story of Lou Pai, who
launched Enron's power-trading business. Pai's group began with a disaster: it
lost tens of millions of dollars trying to sell electricity to residential
consumers in newly deregulated markets. The problem, Hamel explains, is that
the markets weren't truly deregulated: "The states that were opening their
markets to competition were still setting rules designed to give their
traditional utilities big advantages." It doesn't seem to have occurred to
anyone that Pai ought to have looked into those rules more carefully before
risking millions of dollars. He was promptly given the chance to build the
commercial electricity-outsourcing business, where he ran up several more years
of heavy losses before cashing out of Enron last year with two hundred and
seventy million dollars. Because Pai had "talent," he was given new
opportunities, and when he failed at those new opportunities he was given still
more opportunities . . . because he had "talent." "At Enron,
failure--even of the type that ends up on the front page of the Wall Street
Journal--doesn't necessarily sink a career," Hamel writes, as if that
were a good thing. Presumably, companies that want to encourage risk-taking
must be willing to tolerate mistakes. Yet if talent is defined as something
separate from an employee's actual performance, what use is it, exactly?
3.
What the War for Talent amounts to is an argument for indulging A
employees, for fawning over them. "You need to do everything you can to
keep them engaged and satisfied--even delighted," Michaels,
Handfield-Jones, and Axelrod write. "Find out what they would most like to
be doing, and shape their career and responsibilities in that direction. Solve
any issues that might be pushing them out the door, such as a boss that
frustrates them or travel demands that burden them." No company was better
at this than Enron. In one oft-told story, Louise Kitchin, a
twenty-nine-year-old gas trader in
Kitchin's qualification for running EnronOnline, it should be
pointed out, was not that she was good at it. It was that she wanted to do it,
and Enron was a place where stars did whatever they wanted. "Fluid
movement is absolutely necessary in our company. And the type of people we hire
enforces that," Skilling told the team from McKinsey. "Not only does
this system help the excitement level for each manager, it shapes Enron's
business in the direction that its managers find most exciting." Here is
Skilling again: "If lots of [employees] are flocking to a new business
unit, that's a good sign that the opportunity is a good one. . . . If a
business unit can't attract people very easily, that's a good sign that it's a
business Enron shouldn't be in." You might expect a C.E.O. to say that if
a business unit can't attract customers very easily that's a good sign
it's a business the company shouldn't be in. A company's business is supposed
to be shaped in the direction that its managers find most profitable.
But at Enron the needs of the customers and the shareholders were secondary to
the needs of its stars.
A dozen years ago, the psychologists Robert Hogan, Robert Raskin,
and Dan Fazzini wrote a brilliant essay called "The Dark Side of
Charisma." It argued that flawed managers fall into three types. One is
the High Likability Floater, who rises effortlessly in an organization because
he never takes any difficult decisions or makes any enemies. Another is the
Homme de Ressentiment, who seethes below the surface and plots against his
enemies. The most interesting of the three is the Narcissist, whose energy and
self-confidence and charm lead him inexorably up the corporate ladder.
Narcissists are terrible managers. They resist accepting suggestions, thinking
it will make them appear weak, and they don't believe that others have anything
useful to tell them. "Narcissists are biased to take more credit for
success than is legitimate," Hogan and his co-authors write, and
"biased to avoid acknowledging responsibility for their failures and
shortcomings for the same reasons that they claim more success than is their
due." Moreover:
Narcissists typically make judgments with greater confidence
than other people . . . and, because their judgments are rendered with such
conviction, other people tend to believe them and the narcissists become
disproportionately more influential in group situations. Finally, because of
their self-confidence and strong need for recognition, narcissists tend to
"self-nominate"; consequently, when a leadership gap appears in a
group or organization, the narcissists rush to fill it.
Tyco Corporation and WorldCom were the Greedy Corporations: they
were purely interested in short-term financial gain. Enron was the Narcissistic
Corporation--a company that took more credit for success than was legitimate,
that did not acknowledge responsibility for its failures, that shrewdly sold
the rest of us on its genius, and that substituted self-nomination for
disciplined management. At one point in "Leading the Revolution,"
Hamel tracks down a senior Enron executive, and what he breathlessly
recounts--the braggadocio, the self-satisfaction--could be an epitaph for the
talent mind-set:
"You cannot control the atoms within a nuclear fusion
reaction," said Ken Rice when he was head of Enron Capital and Trade
Resources (ECT), America's largest marketer of natural gas and largest buyer
and seller of electricity. Adorned in a black T-shirt, blue jeans, and cowboy
boots, Rice drew a box on an office whiteboard that pictured his business unit
as a nuclear reactor. Little circles in the box represented its "contract
originators," the gunslingers charged with doing deals and creating new businesses.
Attached to each circle was an arrow. In Rice's diagram the arrows were
pointing in all different directions. "We allow people to go in whichever
direction that they want to go."
The distinction between the Greedy Corporation and the Narcissistic
Corporation matters, because the way we conceive our attainments helps
determine how we behave. Carol Dweck, a psychologist at Columbia University,
has found that people generally hold one of two fairly firm beliefs about their
intelligence: they consider it either a fixed trait or something that is
malleable and can be developed over time. Five years ago, Dweck did a study at
the University of Hong Kong, where all classes are conducted in English. She
and her colleagues approached a large group of social-sciences students, told
them their English-proficiency scores, and asked them if they wanted to take a
course to improve their language skills. One would expect all those who scored
poorly to sign up for the remedial course. The University of Hong Kong is a
demanding institution, and it is hard to do well in the social sciences without
strong English skills. Curiously, however, only the ones who believed in
malleable intelligence expressed interest in the class. The students who
believed that their intelligence was a fixed trait were so concerned about
appearing to be deficient that they preferred to stay home. "Students who
hold a fixed view of their intelligence care so much about looking smart that
they act dumb," Dweck writes, "for what could be dumber than giving
up a chance to learn something that is essential for your own success?"
In a similar experiment, Dweck gave a class of preadolescent
students a test filled with challenging problems. After they were finished, one
group was praised for its effort and another group was praised for its
intelligence. Those praised for their intelligence were reluctant to tackle
difficult tasks, and their performance on subsequent tests soon began to
suffer. Then Dweck asked the children to write a letter to students at another
school, describing their experience in the study. She discovered something
remarkable: forty per cent of those students who were praised for their
intelligence lied about how they had scored on the test, adjusting their grade
upward. They weren't naturally deceptive people, and they weren't any less
intelligent or self-confident than anyone else. They simply did what people do
when they are immersed in an environment that celebrates them solely for their
innate "talent." They begin to define themselves by that description,
and when times get tough and that self-image is threatened they have difficulty
with the consequences. They will not take the remedial course. They will not
stand up to investors and the public and admit that they were wrong. They'd
sooner lie.
4.
The broader failing of McKinsey and its acolytes at Enron is
their assumption that an organization's intelligence is simply a function of
the intelligence of its employees. They believe in stars, because they don't
believe in systems. In a way, that's understandable, because our lives are so
obviously enriched by individual brilliance. Groups don't write great novels,
and a committee didn't come up with the theory of relativity. But companies
work by different rules. They don't just create; they execute and compete and
coördinate the efforts of many different people, and the organizations that are
most successful at that task are the ones where the system is the star.
There is a wonderful example of this in the story of the
so-called Eastern Pearl Harbor, of the Second World War. During the first nine
months of 1942, the United States Navy suffered a catastrophe. German U-boats,
operating just off the Atlantic coast and in the Caribbean, were sinking our
merchant ships almost at will. U-boat captains marvelled at their good fortune.
"Before this sea of light, against this footlight glare of a carefree new
world were passing the silhouettes of ships recognizable in every detail and
sharp as the outlines in a sales catalogue," one U-boat commander wrote.
"All we had to do was press the button."
What made this such a puzzle is that, on the other side of the
Atlantic, the British had much less trouble defending their ships against
U-boat attacks. The British, furthermore, eagerly passed on to the Americans
everything they knew about sonar and depth-charge throwers and the construction
of destroyers. And still the Germans managed to paralyze America's coastal
zones.
You can imagine what the consultants at McKinsey would have
concluded: they would have said that the Navy did not have a talent mind-set,
that President Roosevelt needed to recruit and promote top performers into key
positions in the Atlantic command. In fact, he had already done that. At the
beginning of the war, he had pushed out the solid and unspectacular Admiral
Harold R. Stark as Chief of Naval Operations and replaced him with the
legendary Ernest Joseph King. "He was a supreme realist with the arrogance
of genius," Ladislas Farago writes in "The Tenth Fleet," a
history of the Navy's U-boat battles in the Second World War. "He had
unbounded faith in himself, in his vast knowledge of naval matters and in the
soundness of his ideas. Unlike Stark, who tolerated incompetence all around
him, King had no patience with fools."
The Navy had plenty of talent at the top, in other words. What it
didn't have was the right kind of organization. As Eliot A. Cohen, a scholar of
military strategy at Johns Hopkins, writes in his brilliant book "Military
Misfortunes in the Atlantic":
To wage the antisubmarine war well, analysts had to bring
together fragments of information, direction-finding fixes, visual sightings,
decrypts, and the "flaming datum" of a U-boat attack--for use by a
commander to coordinate the efforts of warships, aircraft, and convoy
commanders. Such synthesis had to occur in near "real time"--within
hours, even minutes in some cases.
The British excelled at the task because they had a centralized
operational system. The controllers moved the British ships around the Atlantic
like chess pieces, in order to outsmart U-boat "wolf packs." By
contrast, Admiral King believed strongly in a decentralized management
structure: he held that managers should never tell their subordinates "
'how' as well as what to 'do.' " In today's jargon, we would say he was a
believer in "loose-tight" management, of the kind celebrated by the
McKinsey consultants Thomas J. Peters and Robert H. Waterman in their 1982
best-seller, "In Search of Excellence." But "loose-tight"
doesn't help you find U-boats. Throughout most of 1942, the Navy kept trying to
act smart by relying on technical know-how, and stubbornly refused to take
operational lessons from the British. The Navy also lacked the organizational
structure necessary to apply the technical knowledge it did have to the field.
Only when the Navy set up the Tenth Fleet--a single unit to coördinate all
anti-submarine warfare in the Atlantic--did the situation change. In the year
and a half before the Tenth Fleet was formed, in May of 1943, the Navy sank thirty-six
U-boats. In the six months afterward, it sank seventy-five. "The creation
of the Tenth Fleet did not bring more talented individuals into the
field of ASW"--anti-submarine warfare--"than had previous
organizations," Cohen writes. "What Tenth Fleet did allow, by virtue
of its organization and mandate, was for these individuals to become far more
effective than previously." The talent myth assumes that people make
organizations smart. More often than not, it's the other way around.
5.
There is ample evidence of this principle among America's most
successful companies. Southwest Airlines hires very few M.B.A.s, pays its
managers modestly, and gives raises according to seniority, not "rank and
yank." Yet it is by far the most successful of all United States airlines,
because it has created a vastly more efficient organization than its
competitors have. At Southwest, the time it takes to get a plane that has just
landed ready for takeoff--a key index of productivity--is, on average, twenty
minutes, and requires a ground crew of four, and two people at the gate. (At
United Airlines, by contrast, turnaround time is closer to thirty-five minutes,
and requires a ground crew of twelve and three agents at the gate.)
In the case of the giant retailer Wal-Mart, one of the most
critical periods in its history came in 1976, when Sam Walton
"unretired," pushing out his handpicked successor, Ron Mayer. Mayer
was just over forty. He was ambitious. He was charismatic. He was, in the words
of one Walton biographer, "the boy-genius financial officer." But
Walton was convinced that Mayer was, as people at McKinsey would say,
"differentiating and affirming" in the corporate suite, in defiance
of Wal-Mart's inclusive culture. Mayer left, and Wal-Mart survived. After all,
Wal-Mart is an organization, not an all-star team. Walton brought in David
Glass, late of the Army and Southern Missouri State University, as C.E.O.; the
company is now ranked No. 1 on the Fortune 500 list.
Procter & Gamble doesn't have a star system, either. How
could it? Would the top M.B.A. graduates of Harvard and Stanford move to
Cincinnati to work on detergent when they could make three times as much
reinventing the world in Houston? Procter & Gamble isn't glamorous. Its
C.E.O. is a lifer--a former Navy officer who began his corporate career as an
assistant brand manager for Joy dishwashing liquid--and, if Procter &
Gamble's best played Enron's best at Trivial Pursuit, no doubt the team from
Houston would win handily. But Procter & Gamble has dominated the
consumer-products field for close to a century, because it has a carefully
conceived managerial system, and a rigorous marketing methodology that has
allowed it to win battles for brands like Crest and Tide decade after decade.
In Procter & Gamble's Navy, Admiral Stark would have stayed. But a
cross-divisional management committee would have set the Tenth Fleet in place
before the war ever started.
6.
Among the most damning facts about Enron, in the end, was
something its managers were proudest of. They had what, in McKinsey
terminology, is called an "open market" for hiring. In the
open-market system--McKinsey's assault on the very idea of a fixed
organization--anyone could apply for any job that he or she wanted, and no
manager was allowed to hold anyone back. Poaching was encouraged. When an Enron
executive named Kevin Hannon started the company's global broadband unit, he
launched what he called Project Quick Hire. A hundred top performers from
around the company were invited to the Houston Hyatt to hear Hannon give his
pitch. Recruiting booths were set up outside the meeting room. "Hannon had
his fifty top performers for the broadband unit by the end of the week,"
Michaels, Handfield-Jones, and Axelrod write, "and his peers had fifty holes
to fill." Nobody, not even the consultants who were paid to think about
the Enron culture, seemed worried that those fifty holes might disrupt the
functioning of the affected departments, that stability in a firm's existing
businesses might be a good thing, that the self-fulfillment of Enron's star
employees might possibly be in conflict with the best interests of the firm as
a whole.
These are the sort of concerns that
management consultants ought to raise. But Enron's management consultant was
McKinsey, and McKinsey was as much a prisoner of the talent myth as its clients
were. In 1998, Enron hired ten Wharton M.B.A.s; that same year, McKinsey hired
forty. In 1999, Enron hired twelve from Wharton; McKinsey hired sixty-one. The
consultants at McKinsey were preaching at Enron what they believed about
themselves. "When we would hire them, it wouldn't just be for a
week," one former Enron manager recalls, of the brilliant young men and
women from McKinsey who wandered the hallways at the company's headquarters. "It
would be for two to four months. They were always around." They were there
looking for people who had the talent to think outside the box. It never
occurred to them that, if everyone had to think outside the box, maybe it was
the box that needed fixing.