The Value of Talent

For anything to have value it needs to be measurable. In fact, in scientific circles it’s an article of faith that if you can’t measure something, it doesn’t exist. So the time it takes an electron to orbit an atom is precisely known in yoctoseconds (one quadrillionth of a second).

We’re a little short of that level of precision when it comes to measuring the value of talent. Knowing the value of talent in an organization can have major benefits. For one, it would let the organization know how much better (or worse) off it is than its competitors. It would also help focus recruiting efforts where they generate the most return on investment.

None of this should be news to anyone who reads ERE, but the problem has no easy solutions. That’s partly because it’s hard to define the parameters. Just what constitutes talent? Is it every employee in an organization, or just a few, and if so, which ones?

What about the context? Is an accountant who works for a company with 20 employees the same value as one who works for a company with 10,000 employees? Are the employees in a company that is growing worth more than in a company that is in decline?

In an earlier article I had written that the value of talent could be measured in terms of profit-per-employee. That has merit but is obviously useful only as a global measure. For the concept to be more useful, there’s also a need to be able to measure specific types of talent in an organization and address the types of questions mentioned above.

Evaluating Key Talent

Measuring the value of certain types of talent is easier than others. Talent that has highly visible contributions is the easiest. It was recently reported that the Yankees had hired Roger Clemens at a price that amounted to about $1 million per game. Clemens will cost the Yankees $26.1 million this year ($18.7 million in salary plus a $7.5 million tax the team will pay Major League Baseball for exceeding the salary cap).

An analysis by sports analyst Vince Gennaro shows that Clemens will likely add six wins to the team. Those six wins, if they occur, would catapult the Yankees from a projected 90 wins to 96. Based on MLB history, a 90-win team has just a 31% chance of going to the post-season while a 96-win team has an 81% shot. So adding Clemens to the roster boosts the Yankees’ chance of making it to the post-season by 50%.

For the Yankees, this has two benefits. First, increased revenue from ticket sales, concessions, television ratings, sponsorships, and postseason revenue. Those are estimated to be about $24 million or $2 million less than the cost of hiring Clemens.

Second, the significantly higher likelihood of post-season play will mean that the team can charge higher ticket prices in their new stadium opening in 2009. In total, the payoff for signing Clemens can far exceed the cost of signing him.

The same type of analysis can be applied to key talent in an organization. The definition of key talent can differ, but for the purposes of this article, we’ll limit it to C-level executives. Any C-level role is usually associated with specific profit objectives. The hiring decision frequently has an immediate effect on the stock price of a public company, providing some validation that talent has measurable value.

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Using the same logic as above, value of a C-level executive can be estimated for the short-term from the likely profits generated, and for the long-term from the impact on stock price or increase in value of the company. The specifics of how to arrive at a valuation for the employee can be based on the employee’s past performance, and the employee’s ability to meet the profit objectives set for them in the past. This number needs to be adjusted to factor in the likelihood that the performance will continue.

For the Yankees, 45-year-old Clemens may well upset their calculations. Similarly, for an executive, factors like unfamiliarity with the industry, size of the profit objective, and even age can reduce the probability of achieving the profit objectives, and consequently lower their value to the company.

Context also matters. The Red Sox offered $8 million less for Clemens. But that was appropriate given what he would bring to Boston, estimated to be just four additional wins for a revenue impact of about $13.7 million. With no longer-term objectives, Clemens had far less value to the Red Sox than he did to the Yankees.

The same logic should apply when attempting to put a value on an executive. A company with ambitious goals has much more to gain from a highly talented executive than a company that has modest goals.

That was the rationale behind Ford’s decision to hire Alan Mullally from Boeing. Mullally had faced challenges at Boeing similar to the ones facing Ford, including improving customer satisfaction, manufacturing, supplier and labor relations, and fluctuating fuel prices. He also had experience leading a company on the brink and with eroding market share, as Boeing found itself after 9/11, while facing stiff competition from Airbus.

But with no experience in the auto industry, his value would be less than what it would be if he had come from the same industry.

Human Assets

Current accounting procedures essentially treat talent, however defined, as a cost walking around on legs. That’s largely because people do not fit the financial definition of an asset, and any measure of talent will require some judgment. Then there is the problem that those people in organizations most closely associated with acquiring talent (i.e., HR) often react negatively to the idea of measuring people and are ill-equipped to do so.

Finally, if people are to be treated as assets, then some will also become liabilities. You can’t very well have one without the other. The first step needs to explicitly recognize human resources as human assets. The Society for Human Resource Management, or SHRM, would have to become SHAM, but that’s a small price to pay.

Raghav Singh, director of analytics at Korn Ferry Futurestep, has developed and launched multiple software products and held leadership positions at several major recruiting technology vendors. His career has included work as a consultant on enterprise HR systems and as a recruiting and HRIT leader at several Fortune 500 companies. Opinions expressed here are his own.

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7 Comments on “The Value of Talent

  1. ‘The Society for Human Resource Management, or SHRM, would have to become SHAM, but that’s a small price to pay.’

    Very, very clever!

    I agree – I have long since thought that companies (industry specific) might/could be valued at employee counts. YES I understand factors come into play but I noticed long ago that companies that turned up continuously on my customer’s ‘target lists’ many times were later purchased for extraordinary sums. My belief has always been that in additon to acquiring technology, sometimes all that was really being acquired were ‘souls’.

    Keeping those souls on-board has always been and will be the continuing challenge.

  2. You state that ‘For anything to have value it needs to be measurable’. But first what you’re measuring must be defined and no where in your article do you define talent. I fall back on the definition put forth in the outstanding book ‘First, Break All The Rules’ by Buckingham and Coffman. To paraphrase, they say there are skills, knowledge and talent. Skills and knowledge are generally trainable and job specific. Talent on the other hand is intrinsic to the person and transferable from job to job. Thus charisma and leadership would be talents. Musical ability is a talent; playing the piano a skill.

    It then becomes incumbent upon the company doing the hiring and/or assessing to know what talents they are looking for, define those talents, and then as you stated, find a way to measure those talents.

  3. One of the more literate and ‘leverageable’ articles I have read on the subject in recent memory. A couple of nits: I don’t agree that Mullally’s value was diminished by a lack of direct industry experience; it may have been indeed enhanced without the myopic burden that sometimes accompanies 30 years in one business; he was hired to solidify a large complex company struggling with execution problems and embarassing personal scandals. The sports analogy is one I use CAREFULLY-I have a neighbor who went from a ‘bum’ to the Pro Bowl and a Super Bowl champion in one year simply by changing teams a couple years back, and the acquiring team’s actual expectations were fairly modest. His argument is that the quality of the system / team is central to overall success and that individual talent itself is dynamic, contextual and dependent. As far as the team was concerned, he was just plugging a hole in the system and the system made him a ‘star’. GE is the archtype of a good system populated by good but not ‘superstar’ people. Despite a perennial exodus of top leaders, the company thrives with its strong bench. Back to the sports analogy: by contrast, does Clemens win six more games for NY if Jeter, A-Rod and Posada all break their legs? So the proforma calulations on his expectations are tenuous at best, with a lot of fingercrossing in the front office. Thus my carefulness with sports analogies.

    The great thing about this article is how Raghav challenges recruiters to think past their nose and apply business results to their work that go way beyond the essentially pointless metrics of time-to- fill, offers/candidates ratios, etc. and instead providing a nexus between human assets and business performance. Good job!

  4. This is something that affects a lot of small business denizens like myself – even though we built marketing departments from scratch, worked with limited resources, dealt with many challenges and overcame them to make our employers successful – we are discounted because we didn’t manage a big team or have certain brand names on the resume. We are automatically discounted as being lesser brethern to our corporate counterparts.

    In other words, yes I wish more recruiters would take a holistic view of a candidate and include context, performance, actual results rather than other factors.

  5. I am sorry, but I find the concept of measuring talent to be absurd.

    Nobody cares about talent in a corporation. What they care about is performance.

    Building on what John said, Buckingham has identified and named 34 human talents and even limiting each person to 5, there are some 30 million combinations.

    If you were to look at the top recruiter at 20 different agencies that recruit in 10 different cities for 5 different professions, you would find vastly different talent profiles.

    One person might be successful due to their ability to network and connect with other people. She may be driven by a sense of duty and the inner need to acomplish.

    Another recruiter might be highly strategic, focusing on trends, projecting confidence and driven to succeed by an inner drive to be known as successful in his community.

    Yet another successful recruiter might be highly introverted yet very disciplined and efficient – her attention to detail and her ability to remember names and make matches make her a lot of money.

    None of this even takes into account the impact of a manager and company culture. Some people thrive in a highly structured environment where as others feel stifled and restrained. Some people need high levels of autonomy where others in that situation feel that they are insignificant or uncared for.

    My point is that humans are incredibly diverse and complex. Trying to measure how each person ‘ticks’ is needlessly complicated – not to mention nearly impossible. The best we can get are snapshots of various facets of who we are – but always there is a side that is hidden from the camera and this side goes unmeasured and remains unknown.

    Differing gifts can still produce desired results. There are many dangers to taking our eyes off of performance and results and focusing on ‘talents’ and ‘personality’ and ‘weakness’.

  6. First, I suggest reading some of the work of a human resource cost accountant–Eric Flamholz has written cogently on treating people as assets and buildings as expenses….
    Profit per employee? People are only one capital investment contributing to profit, e.g. robot production, ERP computer investments, marketing and advertising, etc. Current earnings also may misrepresent people–e.g. early stage biotech research organization showing huge losses, but with very productive research scientists, who hopefully are contributing to a future upside.
    Profit? Baseball has a predictable income stream associated with success, but for most companies profit depends on context. If the price of memory chips plummets, selling more may not produce more profit. Market share would be a better measure of (relative) employee success.
    Not only are static measures fragile, but the best employee values are dynamic. Retention and employee development trajectories suggest that predictable future values are important. Employees could be measured the same way a other capital, attending to cost and both present and anticipated future value.
    Good luck, and grab some Flamholz reading material.

  7. I like the posts by both David Rees and Bruce Jorgensen.

    Main point is that profit is dependent on context.

    Measuring the value of talent today is taking very static and arcane HR metrics from retention scores, etc as the be all and end all.

    Talent is complex and diverse.

    There are interesting studies to find trends and CLC is doing some work around quality of hire but as much as I like to measure and understand the measures, this is a tough nut to crack.

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