#5: Make Critical Talent Plays

Use Today’s Crisis to Court and Cultivate Tomorrow’s Winners

Seize the opportunity to close critical skill gaps with “not-in-play” talent.

It’s only the beginning of the buyers’ market for talent. The economic crisis will create a once-in-a-generation opportunity to deepen your talent bench.

And it’s not just a matter of combing through the talent flooding the labor market. One of today’s primary lessons is to take your time, and be picky. Even as job losses in financial services and other talent-centric industries are freeing up long-scarce talent, more is sure to come. While many companies are taking the opportunity to aggressively replace their own underperformers, the best companies are being more strategic. They are prioritizing critical skills first and are still focusing primarily on talented professionals who are not actively looking for a new job. In times of uncertainty, great passive talent is much more likely to be receptive to a job opportunity that offers them a more compelling position or future. The best companies also bear in mind that the reverse is true—other employers are eyeing their top performers—and take measures to better engage and retain their most valuable people.

Reward relative outperformance (even if you must court the wrath of executive-pay watchdogs).

When planning for 2009, companies must resist what will surely be crushing pressure to slash pay for executive high performers. Great executives get paid a lot because the difference in financial results delivered by “average” and “great” is enormous. The company that unilaterally cuts executive pay will more likely get the former rather than the latter. That said, the best companies will rethink golden parachutes and other window-dressing that is out of alignment with shareholder interests. The bottom line: set pay to market, but design packages to reward outperformance.

• Manage governance concerns by removing authority for executive compensation plan design (to the extent possible) from the senior executive team and inside directors.
• Pay for long-term shareholder interests, over-weighting ROIC, EPS, and total shareholder return relative to other metrics (ROA, margins, etc.).
• Determine executive pay on a relative basis compared to an industry peer group, comparing not only total pay, but each component (e.g., bonus, options, long-term incentive plans).
• Avoid monkey business with options—evergreen options, “reloading,” and resetting strike prices. They aren’t necessary and they raise eyebrows.
• Make pay transparent—shareholders shouldn’t need to scour a proxy statement with a magnifying glass to understand how executives are paid.

Use the economic crisis to sharpen the acumen of future executives.

All executive teams will be called upon in 2009 to make critical, in some cases “bet-the-company,” decisions. The best will find structured ways to enfranchise and develop high-potential managers by actively engaging them in addressing issues presented by the economic crisis. The crisis-management experience that this cadre gains now will pay off for decades. The best executive committees are now asking themselves the question,

“What can we do today to make sure that, when the next crisis hits, our future executive team will navigate it skillfully by applying direct experience rather than just observed lessons?”

Re-brand the employment value proposition to recoup productivity losses from suddenly disengaged talent.

Tough times can be demoralizing, and morale has a direct impact on performance. CEB research shows that employee engagement has declined 18% since the week before the financial crisis began, translating into a staggering 3–4 percentage point drop in productivity.

The best companies will craft a clear value proposition for employees, especially in critical talent segments, that outlines their role in helping the company emerge from this crisis. By doing this, they will boost performance levels, increase engagement, protect against poaching, and attract strong talent from companies whose management teams have not refreshed their employment value proposition.

Embrace offshore centers as a source for critical skills and next-generation executive leadership, not just low-cost execution.

A changing world requires a shift in perspective. Following years of rapidly escalating wages in developing economies, companies that continue to view markets such as India or China principally through the lens of labor cost reduction will be disappointed. The best companies will instead shift the conversation about emerging markets from, “a cheap location for non core activities” to, “a new source of core expertise.” Companies that can build an employment value proposition grounded in compelling development and career opportunities—primarily by engaging emerging market talent in strategic priorities—will ultimately drive business performance while containing labor costs.