It may be true downturns complicate talent management. But it’s probably more true that bad talent management exacerbates downturns.
What’s clear is that downturns are terrible news for talent management executives. Whole divisions get burned out as managers scramble to hit impossible goals. The best senior talent leaves. New senior talent doesn’t work out. And most firms end up either comically or tragically unprepared for the eventual upturn.
Extensive work on performance management at the Corporate Executive Board and on relevant metrics through my own independent research has convinced me two tempting mistakes account for these cyclical calamities. The first is that we continue to pay managers for results through downturns rather than for problem solving. The second is that we think downturns are the wrong time for calculated risks even though risks are what downturns make unavoidable.
Start with paying managers for results through downturns. It’s not even clear we should pay managers for results in upturns. It’s our workforces, information resources, and investments that produce results. Managers figure out how to do it — they solve problems. So why not pay managers for solving problems?
The answer is that up to now it has been hard to measure the difficulty of the strategic problems managers solve and their success in solving them. But no longer. As advanced practitioners focus more on the testability of plans, they’re finding ways to separate the effect of errors in execution from errors in planning on performance surprises. And that means you can tell how much noise in results comes from an incomplete understanding of a company’s strategic situation.
The way to pay managers for solving problems is to pay them for reducing strategic uncertainty. Uncertainty means volatility in the size and direction of performance surprises. Strategic uncertainty is how much of that volatility comes from something other than the main controllable and uncontrollable factors a manager has identified.
For example, Nestle lets its worldwide product managers and all-product regional managers renegotiate their goals. That leaves a huge number of targets for individual products in individual markets with roughly equal stretch or difficulty — at least as far as the managers trading those goals back and forth can tell. As a result, the pattern of hits and misses across those product markets provides single-period tests of firmwide strategic initiatives with near-statistical validity.
Even so, paying managers for problem solving seems hard. But what’s the alternative? Paying managers for results in a downturn means paying them to hit an impossible goal or paying them to hit a declining goal. The former burn out their divisions trying to keep up with an outdated standard. The latter get bored if they’re enterprising and leave to learn something new.
And that sheds light on whether downturns are the wrong time to take risks. What’s worse than burning out your divisions and losing your best talent?
When faced with a downturn, nevertheless, most firms start repeating the “stick to your knitting” mantra. And this is true in spite of the well-documented success enjoyed on upturns by firms like Toyota that invest and explore right through downturns.
The advantage of downturns is that talent to lead your firm in exploring new markets and new products can be cheap. Most talent managers shy away from downturn bargains but the reasoning is suspicious. Great talent is prepared to invest with you in the future if the opportunity you offer is interesting.
The reluctance of firms to pay less than top dollar for managers to lead new business developments is a big deal. For one thing, it is one of the only explanations why employment drops in recessions. Robert Hall and others have shown the rate of separation from jobs does NOT rise in recessions. What drops is new hiring — and that usually means new hiring in new fields in downturns.
So how can you attract top talent to explore new business opportunities in a downturn when the results you might expect are both meager and uncertain? Pay those managers for problem solving. In other words, pay them for the amount by which they reduce the strategic uncertainty of the fledgling businesses you ask them to run.
That way, you’re likely to attract the most creative people available and have at least some sense which way to turn when the market does.
David Apgar is the author of “Relevance: Hitting Your Goals by Knowing What Matters” (Jossey-Bass 2008).