Excessive pay, justified by talent

P.J. — Fri, 21 Aug 2009 02:30:01 +0000

Christopher Swann had an interesting commentary in Reuters Blogs yesterday, arguing that: “Excessive banking pay is a social ill. The sector has long sucked in far too much of society’s brightest graduates — putting them to tasks which often have little social value and at worst are parasitic.” These are fighting words, but Mr. Swann is not alone in making the argument that societies benefit little from the bloated and risk-driven financial sector, which tries to justify its compensation by so-called exceptional talent.

Many have questioned whether exceptional talent justifies high compensation. Robert Reich, for example, has this to say about talent in his recent post: “I needn’t remind you that over the last several years Wall Street has exhibited a truly astonishing lack of talent.” (Italics are mine.)

I came across an amazing piece by Malcolm Gladwell, via a guest article by Chris Bones, dean of Henley Business School, in the Economist. Mr. Gladwell’s wrote his piece in 2002, based on a book called “The War on Talent,” published by Harvard Business School Press. The book was written by three McKinsey & Co.’s consultants who headed a project with one objective: to find out what made the best performing companies great. They concluded that the very best companies had leaders who were obsessed with the talent issue. The book also provides valuable advice to leaders that want to make their companies exceptional: “Don’t be afraid to promote stars without specifically relevant experience, seemingly over their heads.”

It seems that not everybody benefitted from this newfound obsession with talent. One company that embraced the talent gospel with a vengeance was Enron. The company was billed $10 million a year by McKinsey & Co. and Jeffrey K. Skilling, Enron’s CEO, was once a McKinsey partner. “The only thing that differentiates Enron from our people is our people, our talent,” said Enron Chairman Kenneth Lay in The War on Talent book. And Mr. Gladwell finds one more priceless gem in the book: “… as another senior Enron executive put it to Richard Foster, a McKinsey partner who celebrated Enron in his 2001 book, Creative Destruction, ‘We hire very smart people and we pay them more than they think they are worth.’”

If you still believe in the talent principle, this is what you do. First, promote stars without specifically relevant experience, seemingly over their heads. Second, hire very smart people and pay them more than they think they are worth. What you may get is another Enron or another Wall Street meltdown.

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Excessive pay, justified by talent