What It Takes to Make ‘Star’ Hires Pay Off

The current economic recession has provided managers with a tempting environment for acquiring “star” employees on the cheap. Consider, for example, how the recent failures of large organizations like the investment banking giant Lehman Brothers and the venerable law firm Heller Ehrman Partners have enticed competitors to go on a hiring spree, acquiring top-notch talent from those now-defunct businesses. Similar opportunistic hires occurred after the downfall of Drexel Burnham Lambert in 1989 and Arthur Andersen in 2002. But the track record of such acquisitions of human capital has been mixed, with many companies failing to integrate their new talent.

Apparently, an organization can’t just hire star employees and then expect those individuals to automatically shine in their new environment. But how, then, can companies ensure that they get the most out of the talent they hire? Our research suggests that co-workers are a crucial factor. In our study of equities analysts, for example, we found that the greater the number of high-quality colleagues an analyst had the better that analyst performed.1 But it wasn’t enough just to have smart teammates: Analysts also benefited from good portfolio strategists (who help investors allocate their entire investment portfolio and whose research complements and contextualizes an analyst’s work) and high-performing salespeople (who ensure that clients are aware of the analyst’s work — and name). In addition, having better colleagues in the immediate workgroup, at the department level and in client-facing roles all contributed to lower analyst turnover, especially among the best performers.

In other words, to get the best out of top-quality workers, management shouldn’t treat them as solo performers but should instead surround them with colleagues of equally high quality. Done correctly, this practice provides three main advantages: It boosts the quality of each individual’s work; it improves the delivery of service to customers; and it reduces turnover among the top performers. The goal here is the so-called Matthew Effect: The more stars a company has, the easier it is to develop and retain such high-caliber individuals. Because of that dynamic, executives should realize that any single decision on hiring and retention can have a large impact on the performance of top employees — sometimes in an entirely different part of the organization. Moreover, they should be aware that certain managerial practices can enhance (while others can unwittingly negate) the specific benefits of star employees.

The Essential Role of High-Quality Colleagues

What, specifically, do high-quality colleagues bring to the table? Our research suggests four main benefits: They act as sources of information; they provide insightful feedback; they serve as valuable interfaces between knowledge workers and clients; and they help enhance the reputations of their star colleagues.

Sources of Information. Information exchange can work in many ways. In the simplest case, one colleague passes along new information to a co-worker. More crucially, however, information exchange can enable both the sharer and receiver to create new knowledge: “You know X and I know Y, which implies Z.” Moreover, people from other departments or who possess a different expertise can provide not only valuable information but also different perspectives. At Morgan Stanley, the former director of U.S. equity research Michael Blumstein describes that potential synergy: “The world is not in the neat little boxes that analysts think they’re in. If you’re the life-insurance guy but you talk to the bank guy, collectively the two of you should be able to come up with some insight that you wouldn’t get working alone.”

Helpful Critics. High-quality colleagues can also function as valuable sounding boards and astute critics of a colleague’s work. Vladimir Zlotnitkov, chief investment strategist at Sanford C. Bernstein, explains how a portfolio strategist can help shape an analyst’s evaluations, especially when the analyst proposes a change in a stock’s rating: “[The portfolio strategist’s] objective is to test the internal logic of your argument,” says Bernstein. “You’re trying to anticipate clients’ reactions and make sure there is closure to your logic.” That kind of feedback is particularly valuable for those professionals who may have abundant raw talent but have yet to develop seasoned wisdom. Amy Schulman, a senior litigation partner at DLA Piper, says that the value of honest feedback should not be underestimated. “Being successful requires you to draw information, both positive and negative, from lots of people you encounter,” she notes. “What people really need are safety valves — people and places that are safe, where they can think out loud.”2

Client Interfaces. Although many professionals interact directly with customers in the course of their work, that’s not the case for many businesses such as advertising, investment banking and engineering in which client service is a specialized role within the organization. In such cases, colleagues at the client interface play a crucial role in positioning and delivering the “product.” (Those colleagues can also provide valuable market intelligence.) In the advertising business, top creative stars might design brilliant ad campaigns, but they still require the skills and knowledge of account executives to convey the full impact of their insights and ideas to clients. Steve Balog, a senior executive at several investment banks, explains how good sales professionals can make or break a star analyst: “All the subtlety of your calls, your thought process, is lost until you get that group educated. And it can take a long time.”

Reputation Enhancers. According to popular wisdom, a bride’s beauty will stand out all the more if she’s surrounded by plain bridesmaids. But in the corporate world, stars tend to shine brighter in a constellation of other stars. Referred to as the “halo effect,” employees of a company that is well known for excellent performance will generally be thought of as better skilled than their peers who might work for more obscure companies. Computer programmers at Google, for instance, are assumed to be better than the average person in their profession. Furthermore, this reflected glory can often lead to an actual increase in performance because of the Pygmalion effect — a phenomenon in which individuals improve to the expectations of others.3 And the halo effect can also benefit stars by increasing their access to resources outside the organization. An analyst from Goldman Sachs, for example, will generally have a far easier time obtaining meetings with executives from Fortune 500 corporations than will an analyst from a small, unknown boutique bank.

Building a Company of Stars

To build a top-notch organization of star employees, companies can’t simply hire the best and brightest and then turn those individuals loose into a Darwinian competition. Instead they need to provide and maintain the right environment for those employees to flourish. But that task is far easier said than done. In fact, we have found that managers often make a number of crucial mistakes when trying to reap the benefits of highly talented individuals. (The book Chasing Stars4 offers more detailed insights in how successful companies hire, develop, retain and leverage their stars.)

Mistake 1: Falling for the “Lone-Star Myth.” One of the biggest mistakes that companies make is that they succumb to what we call the “lone-star myth”: the belief that one individual — a brilliant analyst, a talented programmer, a creative marketer or even a highly touted CEO — can single-handedly turn around an entire department or organization. That mistaken assumption can lead to bad hiring decisions, especially when the star turns out to be more of a diva than a contributor.

To prevent that, companies should consider implementing a thorough interview process that allows a candidate’s future colleagues, including people from different parts of the organization, to probe that individual with a wide range of questions. At Goldman Sachs, for example, Steve Einhorn says, “People were interviewed not only by folks in research but by folks in sales, in equity trading, in fixed income, commodities, currencies, investment banking. So we had a broad range of input with respect to the person that we would be bringing in.” Involving many people in the hiring process also ensures crucial “buy in” for new employees, helping to smooth their integration into the organization.

Companies must also recognize that an individual’s talent, expertise and character are not enough; cultural fit is just as important, if not more so. Ideally, people should be hired from organizations that are culturally similar and with equivalent or fewer resources. A small firm might be tempted to offer a huge salary with an array of benefits to poach a superstar or rainmaker from a big organization, but if that firm can’t provide an equivalent level of support it could be spending a lot of money on someone whose performance is all too likely to plummet.5 Moreover, a company can’t just hire an external star, provide him with a laptop computer and administrative assistant, and then expect him to start producing. Instead, the organization needs to implement an “on boarding” process (to get the new hire up to speed on the company’s culture and resources), set performance metrics and check in on a regular basis.6

Mistake 2: Overestimating the Importance of Pay. Companies will frequently overpay for high-flying stars. Managers should be aware that the ramifications of such a mistake are more than just financial. Conferring a lavish salary on a new hire could demoralize that individual’s future co-workers by making them feel undervalued for their past efforts and loyalties. Moreover, money is hardly the only way to motivate employees. Indeed, one of the most effective ways to motivate and retain stars is to surround them with other stars. Top-notch employees know that working with other smart, competent people increases the quality of their own performance — not to mention, it is also generally more rewarding and enjoyable to work with those who excel at their jobs. The goal is to achieve some critical mass of star power so that a virtuous cycle will kick in: Stars will join the organization because they want to work with other highly capable individuals, which then encourages other stars to join, and so on and so on.

For companies that have attained that critical mass, employees will often be willing to accept less compensation than the market rate. During the glory days at one such organization, an executive recalled, “Our people … were better analysts than they would be somewhere else because of the people in their team helping them and giving them insights into their industry. Our competitors were offering them jobs with hundreds of thousands of dollars more salary, yet they didn’t find it worthwhile to dislodge from what they had here.” In fact, those professionals were willing to accept as much as 20% to 25% less compensation to work in that organization.

But that’s not to say that pay is unimportant. Of course, money matters, and compensation is one way that a company can convey its appreciation of (and investment in) its top performers. But managers need to think strategically about compensation. Instead of big bonuses, for example, would stock options or other forms of equity or deferred compensation be a more effective means for retaining stars?7 Compensation can also be used to encourage collaboration rather than competition. A lone star who is underperforming is bad enough, but a department of stars at one another’s throats is even worse.

Mistake 3: Allowing Stars to Go Solo. That raises the crucial importance of teamwork. When egos get in the way and everyone is jockeying to be top dog, stars might withhold information and attempt to stonewall others’ projects.8 Especially when managerial time and organizational resources are scarce, stars will be tempted to compete rather than collaborate with one another. Remember that these are high-achieving individuals for whom collaboration might not always come naturally. Thus it behooves companies to establish a culture and set of practices to encourage cooperation. Stars are over-scheduled almost by definition, so managers should never assume that collaboration will “just happen.”

Knowledge-management systems can facilitate the sharing of expertise, but they are not a technological panacea. Managers also need to create opportunities for face-to-face contact. One company, for instance, sponsors an annual off-site for all of its professionals, organized around panel discussions and breakout sessions led by facilitators. Another organization schedules a variety of get-togethers: an all-firm meeting (once a year), smaller meetings for practice groups (in-person three times a year, supplemented by videoconferences anywhere from once a week to once a month), partners’ board meetings (in-person quarterly, supplemented by monthly videoconferences) and partners’ meetings (in-person three times a year, also supplemented by monthly videoconferences).

As mentioned earlier, compensation plans can also be designed to facilitate greater collaboration. At Duane Morris, the national law firm, compensation is based on a number of factors that take into account not only an individual’s work but also the extent to which he or she has contributed to the success of others. “Maybe that person had very low productivity but spent three months working on a client pitch for another partner,” explains COO Charles O’Donnell. “Or…maybe that person was out doing seminars for clients that were more promotional than billable [so that] other lawyers could purely focus on billable hours.” That type of compensation system helps establish an environment of greater teamwork, asserts chair and CEO Sheldon Bonovitz. “When we ask lawyers to help us make pitches or cooperate or prepare materials, they don’t say, ‘What’s in it for me? I’m not going to do it,’” explains Bonovitz. “If a lawyer’s a bad citizen, that’s going to adversely impact his or her compensation.”

As a company assembles all-star talent, it should realize that the marginal benefit from an increase in the percentage of stars might actually decline if those individuals are not managed properly. In fact, the marginal benefit might even become negative for organizations with a high percentage of stars.9

Mistake 4: Focusing Too Narrowly. Many companies make the mistake of concentrating their efforts on hiring, developing and retaining stars in just one department, for instance, the R&D lab. But a key finding in our research is that stars need top colleagues throughout the organization in order to do their best work. A single team of high performers in an otherwise mediocre organization might perform well but will likely not reach its full potential. Plus, an isolated group of stars is at significant risk of being poached by a competitor.10 To prevent that, savvy executives try to embed their stars in cross-departmental excellence.

At Goldman Sachs, for example, management doesn’t focus solely on the firm’s star analysts. It also concentrates on developing a high-quality sales force to complement those analysts. As a result, Goldman salespeople are not just crucial in getting clients to accept and act on analysts’ reports; they also help the analysts to perform at a higher level. A salesperson might, for instance, ask the analysts thoughtful, perceptive questions that will help them sharpen and refine their thinking. Or he might relay important client feedback that could provide the analysts with important insights. “Many of the people who serve in what would be described by many just as a sales function are in fact much more than that,” asserts one star analyst. “Many of them are very capable investment thinkers in their own right.”

Mistake 5: Neglecting Homegrown Talent. Executives are often so intent on poaching stars from the competition that they neglect developing their own homegrown talent. But making in-house investments in workers who might not currently be on the A-list but have the capacity to be has a number of advantages. When employees know that management is interested in their development, they will tend to reward the organization with an increased work effort and greater loyalty. In addition, companies that have a pipeline of high-quality talent won’t have to panic when their best developer, salesperson or litigator leaves. Instead of reactively hiring an outside star — and probably overpaying for that person’s service — they can promote someone off their deep bench of talent. And once a company has established a reputation as a star builder, it can become the employer of choice for high-potential raw talent.

An important thing to remember here is that the development of homegrown talent is not just the sole provenance of upper management or the HR department. It is also the responsibility of middle managers as well as the established stars, all of whom should recognize that the more stars that a company has the greater will be its opportunities for increased revenues, whereas a dearth of stars can easily result in a stagnation of business. “I love it when the people that I’ve brought on board shine in their own right,” explains Amy Schulman of DLA Piper. “Clients aren’t stupid, and…if they think you’re the only one who can do things, then there’s a limit to how much [work] they’re going to give you.”

Without a doubt, the current recession has left many managers grappling for answers, but much advice that sounds savvy today may not age very well. The truth is that no one really knows exactly what the economic future holds. Human nature, however, does not change as rapidly as the Dow Jones index, and the hiring, developing and retaining of good employees will always provide a distinct advantage for the companies that excel in those processes. The mass layoffs occurring seemingly on a weekly basis might tempt some organizations to snap up talent quickly at rock-bottom prices. But that strategy can easily backfire, resulting in a tremendous waste of money and demoralization of staff — without the reaping of any benefits. Instead, the more prudent course of action is to nurture in-house talent to develop homegrown stars when possible; hire outsiders strategically and carefully and integrate them well; and create policies and practices that let the light bounce from one star to another, enabling the entire constellation of talent to shine at its brightest.