Topgrading the organization

ROLE OF THE BOARD Topgrading the organization Because of its impact on shareholder value, building a talent advantage over your competitors must be the number-one priority of board members and senior management. BY BRADFORD D. SMART AND GEOFFREY H. SMART Bradford D. Smart has advised leaders of Fortune 500 compa- nies for 25 years as president of Smart & Associates Inc., a con- sulting firm based in Chicago. He is author of "The Smart Interviewer; Tools and Techniques for Hiring the Best" (John Wiley & Sons, 1989). Geoffrey H. Smart is president of G. H. Smarts Co. Inc., also a Chicago-based consultancy, and is a research associate of the Peter F. Drucker Graduate Management Center in Claremont, Calif. I N THE FACE of increasing international and domestic competition, two CEOs attempt to improve their company's performance. Both have read all of the books on the latest man- agement trends. Both have worked with their boards to craft a winning strategy. One CEO suc- ceeds and receives accolades from shareholders and customers. However, the other one feels the intense frustration of failing to implement the strategy be- cause of a lack of employee horsepower. Share- holder value continues to rise in the first case, and continues to be destroyed in the second. After witnessing literally thousands of success- ful and failed executive careers, we have one ques- tion to ask directors and senior managers who want to improve their company's short-term and long- term performance: "Is your company's talent creat- ing or destroying shareholder value?" The funda- mental driver of shareholder value is the talent of everyone in the organization on whom you rely to implement your business strategies. This conclusion is based on a large-scale research base of 4,204 ex- ecutives in 123 companies. We coin the term "topgrading" to de- scribe the practice we observe of not only finding, hiring, and promoting better people at all levels (that would be up- grading) - but proactively hiring and promoting only the most talented peo- ple available, while sensitively but ag- gressively removing chronic underper- formers. This helps companies build a talent advantage over their competitors. It is as if these organizations can boast, "Our sales people are more motivated and effective than your sales people. Our engineers are smarter than your engi- neers. Our officers are better leaders than your officers." Paradoxically, organizations that topgrade do not necessarily pay more for talent. Companies that topgrade tend to look harder to find talent, screen harder to select the right people, and act more quickly to confront nonperformance. In relation to their competitors, these companies get dispropor- tionately better talent for the compensation dollars they spend. Building a talent advantage over your competi- tors does not happen without a high degree of focus and energy. Topgrading the organization must be a top priority of board members and senior man- agement. If it is not a priority, then hiring the best and brightest is just given lip service. We estimate that less than 5% of U.S. companies are topgrading. As Peter Drucker said to us one time, "The tough- est decisions in organizations are people decisions - hiring, promoting, firing, etc. The ability to make good decisions regarding people represents one of the last reliable sources of competitive advantage since very few organizations are very good at it." We wince every time an undertalented compa- ny tries to implement TOM or some other initiative and push decisionmaking responsibility down in the organization. Underskilled or undertalented employees are given decisionmaking authority and end up making bad decisions. Performance in- evitably suffers. In contrast, organizations that topgrade are able to drive improvements or changes in strategic value drivers such as productivity, innovation, quality, customer service, and time to market. They experi- ence greater success in these areas because they have the most competent employees on whom to rely. Having consistently strong operational performance can be a powerful force in building shareholder value. Of course, other factors such as macroeco- nomic trends, currency fluctuations, industry changes, and customer preferences can all affect 22 DIRECTORS a BOARDS ROLE OF THE BOARD shareholder value as well. We are not saying talent is the only driver of shareholder value, but that it is a key one - and one of the only ones that senior managers can directly control. Ratcheting up the talent level of a com- pany is a lot easier than trying to affect the strength of the U.S. dollar. The idea behind topgrading is so simple, we are often shocked that so few companies do it. We have found that far too often, managers at all levels make the costly mistake of trying to "manage their way" to excellence with low-performers on their team. This article provides a framework for illustrating how topgrading is a primary driver of shareholder value. In addition, the six most common organi- zational obstacles to implementing the practice of topgrading are identified. Finally, several brief case examples illustrate how some of this nation's most successful companies develop and maintain this powerful competitive advantage. Talent counts In the 1992 and 1996 Olympic Games, the Ameri- can basketball Dream Team had no problem crush- ing its competitors. What was the primary source of its competitive advantage? Better strategic think- ing? Better business processes? Was the team a learning organization? Was it the team's commit- ment to embrace change and innovation? No. The dream team's fun- damental competitive advan- tage was clearly the talent. All other advantages flowed fiom this primary driver of perfor- mance. The team was com- prised of high-performers, or A players. There were almost no B players and certainly no C players to drag the organi- zation's talent level down. AlliedSignal's Chairman and CEO Larry Bossidy is a believer that nothing his com- pany does is more important than hiring and developing the right people. He contends that strategies are intellectual- ly simple but the success of strategy implementation de- pends on who is doing the im- plementing. Proactively seeking out and employing the most talented people can have a multiplier effect on the creation of other competitive advantages. High-perform- ers, the A players, contribute more, inno- vate more, work smarter, earn more trust, display more resourcefulness, take more initiative, develop better business strate- gies, implement change more effective- ly, deliver higher quality work, demon- strate greater teamwork, and find ways to get the job done in less time with less cost. Across our sample of companies, only 25% of their employees were A players, 55% were B players, and 20% were C players. What is topgrading? Topgrading simply means proactively seeking out and employing the most tal- ented people available, while redeploy- ing (internally or externally) those of lesser ability or performance. More specifically, we view topgrading as em- ploying only A players. These folks are in the top 10% of the talent available. "Available" is defined as the total number of people in the pool of talent who are willing to work for a given compensation level, in a given company, in a given town. Whether the number of available people is 20 or 20,000, topgrading means Unlike so many factors that also affect shareholder value, the board and senior management can directly control the talent level of the company. Bradford Smart Proactively seeking out and employing the most talented people can have a multiplier effect on the creation of other competitive advantages. Geoffrey Smart inserting only the most talented ones available into every job. B players fall in the next lower 25%, and C players drop below the 65th percentile. The accom- panying exhibit is a brief summary of be- havioral competencies for a division president. In fact, dozens of competen- cies should be included, and they should be carefully tailored to the specific job. Another way of thinking about top- grading is making a commitment to real- izing the most "bang for one's buck" with respect to the total cost to employ people. The process of topgrading should start with the board's decision to topgrade the CEO position. An A-player CEO will then make topgrading a top priority for all levels of the organization. Specifical- ly, the most successful companies we en- counter simultaneously execute the four elements of topgrading: 1 ) Proactively searching out and iden- tifying A players (from within or outside of the firm). 2) Using the most advanced and rig- orous selection methods to make fewer SPRING 1997 23 ROLE OF THE BOARD Masters at topgrading: According to the authors, AlliedSignal's Larry Bossidy is a believer that nothing his company does is more important than hiring and developing the right people; Bill Gates himself makes calls to talented undergradsto recruit them to join Microsoft ("Imagine that a college senior picks up the phone in the dorm room one night and Bill Gates is on the line asking him or her to join the company!"); and GE's Jack Welch frequently says that his job is to get the right players on the field and to occasionally call the big plays, and calls himself the "top personnel guy around here." mistakes and hire and promote only A players. 3) Improving the existing "human capital" by providing employees with developmental train- ing, and/or redeploying low performers into roles in which they can excel. 4) Requiring subordinate managers at all levels to embrace the topgrading approach for the creation of their teams. In high-performing companies, this process is ongoing and is not a one-time strategic initiative or program. Who is topgrading McKinsey & Co. is known for its commitment to seeking out and employing the best people available at every level. This philosophy comprises one of the points in its mission statement. 3M, Procter & Cam- bie, Ceneral Electric, and AlliedSignal attract and retain A players and quickly redeploy C players. These organizations topgrade as a way of life. However, there are plenty of smaller companies that also topgrade. You may recognize them as the grocery store with uncommonly friendly employ- ees, the dry cleaner that goes out of its way to serve you, or the restaurant where every member of the staff seems competent, responsive, and enthusias- tic. The most successful organizations in our data- base tended to have at least 75% of their people in the A-player range and have almost no C players. Obstacles to topgrading Many managers are committed to the idea of em- ploying highly talented people, but find its imple- mentation challenging. We have asked thousands of se- nior managers to describe what they have done to in- crease the talent levels of their teams. Drawing from the myriad of successes and fail- ures, we have distilled the most troubling obstacles that managers face in ratcheting- up the organization's talent level. Eollowing each descrip- tion of the obstacles is the best solution to overcome the barrier. Obstacle 1: "We think we are hiring high performers, but they turn out to be C players once they are on the job." Solution: Your organization will make fewer hiring mistakes if it adopts the most advanced assessment methods available (described below). Making hiring mistakes is a very common prob- lem. It is due primarily to using ineffective methods for assessing candidates. Many companies in our sample put candidates through a series of brief "tell me about yourself" interviews which result in a typ- ical hiring success rate of only around 50% (half of the new hires work out). This disappointing re- sult may even happen when eight of your people in- terviewed the candidate for an hour each. In com- parison, organizations that use better methods typically are successful at hiring the right people 90% of the time. It is impossible to topgrade if your organization cannot accurately assess who is walk- ing in the door. So what is the most accurate and reliable way to assess people? Our recommendations in the next few paragraphs are based on over 30 years of com- bined experience in this area. In addition, we com- pared notes with other experts in the field, and re- viewed several hundred scientific studies on "best practices" for assessment. There are two critical components in the most ef- fective assessment processes: the job analysis, and the chronological, in-depth interview. The job analysis at senior levels is too often "delegated" to the executive search firm, which too often results in a "boilerplate" job description. Error-free hiring be- gins with the hiring manager's rigorous analysis of the job in relation to corporate strategy and the de- 24 DIRECTORS a BOARDS ROLE OF THE BOARD sired organization culture. The job description will also include what it takes to do the job - the dozens of behavioral competencies that are critical for suc- cess or failure in the position. This list essentially be- comes a "blank scorecard" with all of the dimen- sions against which the candidates will be evaluated. These competencies should include any knowledge, skills, abilities, operating style, or any other factors that will affect the behavior and performance ofthe person in the position. Next, the screening process should include one chronological, in-depth interview. This format ap- pears to be the most accurate tool for gaining vivid insights into the candidate's strengths and limita- tions in the dimensions that were identified on the scorecard. The point of this interview format is to make sure one gets sufficient data to make an in- formed judgment on each ofthe critical dimen- sions. Failing to get a clear reading on even one di- mension can result in a hiring mistake. Such an interview typically last 3-4 hours and chronologically covers the candidate's entire ca- reer history with a fine-toothed comb. It does not rely on asking candidates hypothetical questions be- cause these questions are too easy to fake and their responses often do not refiect what people actual- ly do. Instead, this type of interview focuses on their actual experiences over the course of their entire ca- reer. Clear patterns surface that make it easy to see what their strengths and weaker areas are and allow your people to accurately predict how they would do on the job. Across each job or relevant experience in the per- son's career, we ask a core group of six questions: 1) Their expectations coming into that job; 2) Responsibilities in that job; 3) Accomplishments and other high points; 4) Failures and low points; 5) TORC; and 6) Reasons for leaving. TORC stands for "Threat of Reference Check." This is asking candidates, "If we call that former su- pervisor, what will he or she tell us were your spe- cific strengths and weaker areas in that job at that time?" These questions yield extremely valuable in- formation. This is not a bluff. Finalist candidates are asked to set up those reference calls. This interview takes 3-4 hours, whereas a typi- cal informal interview lasts less than one hour. However, the total hiring process we are describ- ing should not take any more time or money than the typical ineffective assessment methods. Your company saves time by identifying C players earli- er in the process before they advance to later rounds of interviews and waste your people's time. Decades of research suggest that the process we describe is the most accurate assessment method, and is far superior to informal interviewing (which is the most common method) or other methods such as assessment centers or paper-and-pencil psy- chological testing. Obstacle 2: "Our HR department is supposed find and screen top talent, but they do not give our line managers what they need. And we are all so busy putting out fires, we don't have time to find A play- ers." Solution: Do more yourself to recruit and develop A players. AlliedSignal's Larry Bossidy said that the re- sponsibility to recruit superior managerial talent at all levels is a role the CEO cannot delegate. The CEO must own the topgrading ^_^__^^^__^_ process if the organization is to understand that it is a key priority. That means a visible, systematic, and persistent commitment of the CEO. Bossidy is personally involved in hiring decisions for the top 150 executives and tracks their progress in semiannual management resources re- view meetings. Bill Gates himself makes calls to talent- ed undergrads to recruit them to join Microsoft. Imagine that. A college senior picks up the phone in the dorm room one night and Bill Gates is on the line asking him or her to join the company! Successful leaders find that they are in the "re- cruitment business" for life. They are constantly on the lookout for talented people - at professional gatherings, university programs, community service boards, etc. They keep a "network file" so when a po- sition opens up, they can immediately tap their net- work for candidates or referrals. This way, they save the cost and time of a search, and their finalist can- didates have been personally pre-screened. At William M. Mercer Inc., Managing Partner Charles Hartwig occasionally has breakfast or lunch with prospective recruits two or three times per week. He once spent half a Sunday interviewing a candidate for a position three levels down in the or- ganization. Not surprisingly, his division is packed with talented people. Contrast this example with the countless examples in which managers rely exclu- sively on the HR department for candidates and do Procter & Gamble, 3M, General Electric, and AlliedSignal topgrade as a way of life. However, there are plenty of smaller companies that also topgrade. SPRING 1997 25 ROLE OF THE BOARD Talent and shareholder value Talent ' Employees ' Managers > Directors Operational Performance Productivity Innovation Quality Customer service Speedto market Shareholder Value ' Increasing revenue ' Decreasing costs ' Increasing earnings ' Increasing dividends ' Increasing share price Successful leaders find that they are in the 'recruitment business' for life. not get involved in the recruitment process at all. If your senior managers think that they do not have time to topgrade because they are too busy putting out fires, ask them how much time they waste addressing problems that the C players in the company should have prevented or fixed. Skimping on the talent search leads to more C players being hired, which means more fires, which means less time. Stop the downward spiral by replacing the C players with A players. Obstacle 3: "We want to change the organization's culture and raise the performance bar... but almost every talented person I bring in from the outside is rejected by the current culture and ends up quitting." Solution: Provide "air cover" for your new change agents. This was a common problem for the organiza- tions in our dataset. An executive realizes that his or her company, unit, or department is far from world- class. The low-performance culture - often characterized by low accountability, fear of change, autocracy, low inno- vation, poor communication, slow pace, and/or lots of ex- cuses - reinforces itself be- cause of an incestuous pro- mote-from-within policy. In this case, it is critical to seek out and employ A players who will help drive the culture-change process. It is often essential to hire those A players that have the competencies, skills, and attitudes con- sistent with the desired culture. Additionally, they will not be rejected by the old culture if senior man- agers provide them with air cover by making it clear to the others that the new hires have their full sup- port. Solution: You can't afford to not hire A players, so do it! This excuse does not make sense under our the- oretical framework. A players are available at all compensation levels - they are people above the 90th percentile of overall talent of all potential can- didates at any given compensation level. Organi- zations are always paying for A players, whether or not they get them. That means that a company that is paying its C player marketing director a $90,000 base salary could hire an A player for the same salary. Another way to look at it is that your return on in- vestment in A players is positive and big, and your return on investment in C players is negative and big. Obstacle 5: "I do not want to fire loyal C players." Solution: Give G players a chance to become A play- ers. If they fail, then redeploy them into a role in which they can perform well (but if this also does not work then you must counsel them out of the company). C players are sometimes given a chance to be- come A players with extra training and a redefini- tion of their job responsibilities. A C player can be considered one who is overpaid and/or underper- forming. By reducing pay (a "long-shot" solution) and/or improving performance, C players can be- come B players, or even A players. Nobody is a C player all of the time. People are C players when they are mishired, mispromoted, or misdeployed within their company. Theoretically, everyone can be an A player. The best organizations ask the question, "In what sort of role (and for what level of pay) can this person be an A player?" Such organizations systematically align individuals' responsibilities to be consistent with their strengths and weaknesses. Former Dial Corp. Chairman John Teets, at a roundtable meeting of CEOs, said that the most common self-criticism was not moving fast enough to remove long-term underperforming executives. Just as A players provide an uplifting force to an or- ganization, C players can sink the ship. In 1996 alone, 53,549 businesses declared bankruptcy. The best way to avoid firing C players is to not hire or promote them in the first place. The next best alternative is to have a hard-hitting performance management system that generously rewards, retains, and develops A players: A players thrive in that environment, whereas C players may end up taking a less demanding job somewhere else. Obstacle 4: "We can't afford to hire A players." Obstacle 6: "Our problems will soon clear up be- 26 DIRECTORS & BOARDS ROLE OF THE BOARD cause we engaged a strategic management consult- ing firm, and its report looks great." Solution: Topgrade if you want to drive the success- ful implementation of the strategic recommendations. Great strategy combined with a team of high per- formers can reasonably be expected to increase a company's performance. However, expensive con- sulting engagements often fall flat when the com- pany managers lack the talent to drive successful im- plementation. In chess, great strategy will not prevail if one player has nothing but a few pawns while the opponent enjoys a board full of royalty. Talent is a necessary ingredient to making strategy implementation possible. What does topgrading look like? The following cases briefly describe what topgrad- ing looks like at several large and small companies in our database. Each of these executives gave per- mission to have their topgrading story told. Reversing the Slide: Travelers Express Co. in 1991 (when it was a division of Dial Corp.) was a cash cow that was drying up. After years of flat earnings, the president was removed. The new president. Summary of Critical Hiring Competencies Position: Overall Talent Level Intelligence Vision Leadership Drive Resourcefulness Customer Focus Hiring Team-Building Track Record/ Experience Integrity Communication President (base compensation level, $250,000) A PLAYER Top 10% of those at this salary level 130 or higher IQ; a "quick study"; able to rapidly perform complex analyses Facilitates the creation and communication of a compelling and strategically sound vision Initiates needed change; highly adaptive and able to "sell" the organization on change Passionate; high energy level; fast pace; 55 (+) hour work weeks Impressive ability to find ways over, under, around, and through barriers; invents new paradigms Extremely sensitive and adaptive to both stated and unstated customer needs Hires A players and employees with A potential Creates focused, results-driven teams; energizes others Exceeds expectations of employ- ees, customers, and shareholders "Iron-clad" Excellent oral/written skills B PLAYER 65th-89th percentile at this salary level 120-129 IQ; smart, but not as insightful as an A player Vision lacks credibility; is somewhat unrealistic or strategically flawed Favors modest, incremental change; lukewarm "followership" Motivated; energetic at times; 50-54 hour weeks Open-minded and will occasionally find a new solution Knows that "customer is king" but does not act on it as often as A players Hires Bs and Cs; suffers from an occasional costly mis-hire Less adept team-builder Meets key constituency expectations Generally honest Average oral/written skills C PLAYER Below the 65th percentile at this salary level 110-119 IQ; has difficulty coping with new, complex situations Embraces tradition over forward thinking Prefers the status quo; lacks credibility so people are hesitant to follow Dedicated; inconsistent pace; 40-49 hour weeks Requires specific direction Too inwardly focused; perhaps misjudges the "inelasticity" of demand for the firm's products and services Hires C players; crises occur due to low talent leve- Drains energy from others Sporadically meets expectations "Bends the rules" Mediocre SPRING 1997 27 ROLE OF THE BOARD In chess, great strategy will not prevail if one player has nothing but a few pawns while the opponent enjoys a board full of royalty. Robert Bohannon, immediately topgraded the com- pany. In the first year, Bohannon replaced most of his executive team. He used in-depth chronological interviews to hire and promote only A players. The in-depth interview process led to zero hiring mis- takes. The new team embraced topgrading, replac- ing 30% of all employees in the next two years. Bo- hannon and his vice presidents personally drove the process of identifying A players, B players, and C players. He gave each B and C player a fair chance of becoming an A player. Some C players were re- moved. Over one quarter of the C players were rede- ployed into roles in which they could perform as A players. The results? Record rev- enues and profits were achieved during 1992- 1996. Morale has been sky- high. The successful vision and strategy were created by the new "dream team" ^^ ^ ^^^^ of j^jgh performers. Re- cently, Bohannon was named chairman and CEO of Viad Corp., the $2.6 billion publicly traded com- pany created from a 1996 spinoff of the old Dial Corp. Large-Scale Change and Growth: From 1991 -1994, Nielsen International's CEO Christos Cotsakos re- organized the non-U.S. businesses of the world's largest marketing firm. Cotsakos found that too many C players were comfortable with slow growth. Cotsakos initiated a program that required everyone to reapply for his or her job. All but two of the top 50 executives changed jobs; some were promoted or reassigned, and many left voluntarily or were termi- nated. Cotsakos' topgraded organization achieved record financial performance in 1992-1995. Cot- sakos, promoted to president of ACNielsen World- Wide, said, "We topgraded at a frenetic pace - hir- ing, assessing, coaching, firing, reorganizing." Jncreasing Shareholder Value: Beginning in the mid-1980s. Chairman and CEO James DiMatteo of Dominick's Finer Foods, a $2.5 billion grocery re- tailer, initiated the topgrading process. The CEO and his officers were evaluated using the in-depth chronological interview plus co-worker evaluations, and received executive coaching every two years. No senior executives were removed, though several A players were added to the team. However, almost one-fourth of the store managers were deemed C players and were removed (most became depart- ment managers) after extensive feedback and job coaching. The topgrading process helped to identi- fy and develop an internal executive, Robert Mari- ano, who was recently promoted to president. From 1985-1995, the firm's value grew by 15 times. Being Premier at Everything You Do: General Elec- tric benefits from its unusually thorough and ef- fective systems to assure that its businesses are "packed" with A players. The firm accomplishes this by hiring A players, by developing its B players into A players, and by removing a few C players who do not improve and do not fit other positions. Chair- man and CEO Jack Welch frequently says that his job is to get the right players on the field and to occa- sionally call the big plays. He calls himself the "top personnel guy around here," affirming his personal commitment to hire and promote the best people. Officers at GE are periodically put through an ex- tremely comprehensive tandem (two interviewers) assessment and development process. For each can- didate, human resources professionals conduct an in-depth chronological interview and confidential co-worker interviews, and provide hard-hitting feedback to the individual in a 15-20-page report containing specific developmental action plans. Twice per year, in what is called "Session C," Welch devotes a full day or more to the human re- sources issues of each of GE's businesses. After vis- iting the businesses, Welch himself evaluates each executive's strengths, weaker points, and progress on their developmental plans. Nothing impacts the topgrading process more powerfully than the CEO's personal commitment to make sure it happens. Driving value upward For those charged with the awesome responsibili- ty of increasing shareholder value, topgrading pro- vides a powerful tool. They can ask if the compa- ny has the top 10% of the talent available, and, if not, "Why are we paying for A players and not get- ting them?" They can ask if the hiring success rate is around 90%; if not, "Why are we not using the most advanced selection methods available to screen people?" They can ask why so many C play- ers are causing problems when, for the same salaries, A players can drive shareholder value upward. By increasing the talent level, you can expect to see key performance indicators go up. Unlike so many factors that also affect shareholder value such as customers, competitors, investors, and broad eco- nomic trends, the board and senior management can directly control the talent level of the company. Since so few companies topgrade, it represents a re- liable source of competitive advantage. For now. 28 DIRECTORS a BOARDS

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