Talent is an organizational capability

Everyone knows what talent management means, right? Yet despite widely accepted common practice, most talent management approaches fall way short of the mark when it comes to improved strategy execution and organizational effectiveness.

When we talk about accomplishing business objectives and achieving strategic success, the talent that’s embodied in people plays a critical role: without the contributions of individuals, nothing would ever happen. Yet this traditional way of defining and focusing on talent leaves a gaping hole in what we need to know: there are other major components of work design that must be included to optimize organizational performance and achieve strategic success. No one is an island, and that applies in spades at work.

Individual performance depends on a lot more than individual competencies: it requires the right motivation and job design. And looking at performance one person or role at a time (traditional talent management) loses sight of how the organization design and culture, along with business and HR processes, combine together to produce the desired business results. That’s how the individual plus organizational aspects of talent come together to produce strategy execution and organizational effectiveness.

Where to start. There is so much work to be done improving talent processes, it can be hard to know where to start. Should we make our managers better coaches? Should we do a better job of matching developmental opportunities to people’s desired career plans? Should we find a way to better hold people accountable for their performance, with clear signals about the competencies they need to be successful? The answer to each of these questions and a dozen more on related people issues is “of course.” But the problem for HR is that everyone in both the business and HR has only so much time and energy to focus on making improvements. If we don’t focus our efforts on the issues that matter most for business success, we run a very high risk that our managers and leaders won’t be engaged in what we want them to do and, even worse, the business results could suffer, increasing the chances of cutbacks in budget dollars and wholescale de-emphasizing of talent development while people focus exclusively on righting the ship of business performance.

The solution I propose, based on years of working with companies to solve large organizational challenges, is to take a systems view of the role of talent in business success.

There are two parts to the systems view: what happens at the individual or role level and what happens at the group or organizational level.

Ask most people what “talent” means to them and the first – and only – thing that usually comes to mind is people. Talent of course is more than headcount. It’s how the work is done, and is often used interchangeably with labels like competencies and human capital.

Using the systems approach to expand the view of talent also has direct implications for talent development. If talent means more than just individual competencies or skills, then traditional talent development tools and programs won’t be sufficient for all aspects of talent at both the job level and the group level. So talent development has to include what’s traditionally covered, along with an added focus on what matters for developing talent at the organizational level. This added component means focusing on developing both individual and organizational capability at the same time.

I use individual capability as a stand-in for what someone brings to the table to get the job done: the competencies (knowledge, skills and abilities) that enable them to do the work they are responsible for. Organizational capability is similar but also quite distinct; it’s how the organization gets all the work done, across all roles and processes, but it is much more than just the sum of individual capabilities of the people. For example, innovation is one type of organizational capability. In order to have innovation, you need the building blocks provided by the competencies of roles like engineers, software programmers and/or scientific researchers. Yet organizational innovation is never accomplished solely through the individual contributions of people in those roles. We also need the right mix and alignment of organization design, culture and processes.

This fundamental difference between individual vs. organizational capability is what drives the contrast between the traditional view of talent and my focus. The problem with business as usual in the talent field is we are way too obsessed solely with people: who they are, what they bring to the table, how their careers evolve, and so on. What’s missing – in a huge way – is the alchemy that combines all those individual efforts and contributions so that the whole ends up being greater than the sum of its parts. If we don’t take a look at the big picture, the systems view of talent, we are guaranteed to miss critical pieces of the puzzle that are essential for driving strategy execution and organizational effectiveness.

Conducting talent systems diagnostics. The traditional view of talent as individual skills or human capital is one of only six contributors to organizational performance; the other two at the individual level are motivation and job design. There are three additional important factors at the group level that are usually totally excluded from traditional views of the link between talent and business performance: organizational capability, organization design, and culture. In particular, the alignment among roles in contributing to performance often is as important if not more important than the individual role contributions.

One of the most impactful things that talent professionals can do to help the organization is co-leading systems diagnostics. A systems diagnostic determines the barriers to improved business performance, including the role of individual capability versus other contributors. With the diagnostic results in hand, comprehensive solutions can be implemented; those solutions often include elements of traditional talent management and development but also include a broader set of org changes and programs to improve alignment and performance at the group and organizational levels.

What emerges after doing a systems diagnostic is not always an individually-focused talent solution. The changes that need to occur usually involve a lot more, including potentially redesigning jobs and work processes, improving team collaboration, getting better cross-functional alignment, etc. Though the solutions usually involve much more than traditional individually-focused interventions, in each case there almost always is a clear and specific role for individual-focused talent management and development to play. It’s just that the talent solution cannot stand on its own with solely an individual focus. It has to be coordinated with a larger set of organizational changes for maximum impact.

The main reason why we have to look at group performance separately from role performance is because of the interdependencies among jobs. No person or job is an island: organizational performance only occurs when people in multiple different roles combine and align their actions to create the products and services customers are willing to buy. If we look at any role in isolation, we cannot know whether it is working in concert or in conflict with the other roles in the group. Essentially, we need to know whether the whole of the group’s output is greater than the sum of the individual jobs’ tasks. If not, then talent at the group level is not performing as it should.

Your High Performers Are Watching How You Treat Low Performers

One of the most important environmental factors affecting employee performance is the performance levels of their coworkers.

Humans are herd animals and we pay attention to what the rest of the herd is doing. What we believe is impressive, possible, or simply expected at work is based in part on what our coworkers are accomplishing. The drive and skills of people is affected by the drive and skills of the people around them. There are individual differences in how much people focus on others’ performance and how they react to competition. But all people are affected by the performance of their coworkers in one way or another. To paraphrase the poet John Donne, no one is an island.

High performing people draw energy and ideas from being around other high performers. They lose energy and inspiration when forced to work with people that don’t share their focus on doing the best job possible. If you want highly engaged and productive high performers, then you must effectively manage low performers.

Strugglers and Misfits

In my experience, there are two general kinds of low performers: strugglers and misfits. Strugglers are not counterproductive, they just aren’t productive enough. Although strugglers have bad performance they are not bad employees. They are good employees who are finding it hard to meet expectations at a given point in time.

Strugglers should be coached to raise their performance, both for their sake, and because tolerating their underperformance creates a drag on the performance of others. Part of coaching them is giving them confidence that they can be successful. You want and may even need strugglers to stay on the team. But you need them to act differently in the future from how they acted in the past.

Misfits are employees whose behavior is actively detracting from the performance and morale of the company and their coworkers. These people may be in the wrong job or may simply have the wrong attitude toward their work. These are people who must “shape up or ship out.”

Most misfits are a result of hiring the wrong person for a job, changing an employee’s job to the point that they can no longer perform it effectively, or having an employee undergo a change in attitude toward their job often due to non-work related issues. It is important to give misfits a chance to improve, but it is equally important to get them out of the job if they fail to get better.

How Low Performers are Treated Matters

Employees watch how their company deals with low performers. If the company tolerates low performance then employees will conclude that low performance is acceptable, even if they personally hold themselves to a higher standard.

Employees will also notice if you treat low performers in a cruel and insensitive manner. Every employee may struggle with performance at some point in their career. When this happens, employees remember how the company treated others in this situation. How the company treated their coworkers in the past will influence whether they constructively engage with the organization to improve their performance, attempt to hide their challenges, or simply quit.

good performance management process must effectively address both good and bad performance. It is true that much of performance management is about recognizing and supporting high performers. But you cannot have a true high performance organization if you don’t effectively address the reality of low performance.

4 approaches to strategic planning: what’s right for HR?

There are four approaches to strategic planning, each of which has important implications for the design and delivery of HR practices including cultural, talent, performance management, communications and leadership development, writes Wayne Brockbank

Strategic planning must be one of company’s core processes. A group of colleagues and I recently reviewed the full range of approaches to strategic planning. We combined our collective experience from hundreds of businesses along with a review of dozens of books, academic articles and professional publications, and a useful typology of alternative approaches to strategic planning emerged.

The resulting typology is based on two dimensions: the focal origin of information (internal versus external) and the process of information analysis and decision making (top down and regimented versus engaging and dynamic). Combining these two dimensions results in four approaches to strategic planning. Each of the four approaches to strategic planning has important implication for the design and delivery of HR practices including cultural, talent, performance management, communications and leadership development.

The first approach: successful and stable organisations
The first approach starts with internal information that is examined and utilised by a small group of expert planners at the top the organisation. They set strategic goals based on historical performance and cascade these goals down through the corporate hierarchy. Reporting of goal accomplishment flows back up through hierarchy to the originating experts. This traditional approach to strategic planning was popularised in the 1970s and 1980s.

“This approach tends to be found in traditionally successful organisations in stable environments that are frequently monopolistic or oligopolistic”

When this form of strategic planning is applied, HR should focus on sustaining a culture of hierarchical control, discipline and regimentation. Talent requirements include technical experts (frequently with financial backgrounds) at the top who set goals and direction with the mass of employees focusing on execution. Performance management concentrates on measuring and rewarding quantitative output goals. Leadership development emphasises skills and tools of strategy execution. This approach tends to be found in traditionally successful organisations in stable environments that are frequently monopolistic or oligopolistic.

The second approach: organisations with portfolio diversification
The second approach starts with information that originates from the outside and is then translated into goals and organisation-wide initiatives. Frequently this approach emphasises industry analysis such as the case Porter’s Five Forces. As in the first approach, the strategy formulation is done by a small group of strategic planners who pass their goals and initiatives to strategy implementers through the administrative hierarchy. The strategy planners will tend to have strong backgrounds in the economics of industry analysis. They determine what configuration of businesses will comprise the corporate portfolio along with the business activities will be insourced or outsourced.

“This approach tends to be found in corporations with moderate to high levels of portfolios diversification”

The senior leadership culture will emphasise innovation and competitiveness at the industry level while the rest of the organisation will focus on innovation and competitiveness at the business level. Performance management will focus on measuring and rewarding these two employee groups on the basis of performance relative to industry competitors at corporate and business levels respectively. This approach tends to be found in corporations with moderate to high levels of portfolios diversification.

The third approach: entrepreneurial organisations expanding core capabilities
The third approach begins with an examination of the internal capabilities which provide the starting point for competitive advantage. Strategic capabilities are determined through the dynamic involvement of large numbers of employees. The culture is entrepreneurial and engaging. Internal information is widely shared and discussed. The goal is to make the information whole greater than the sum of the parts. Since engagement is central to this approach, performance management not only focuses on results but also on behaviours that generate and implement creative ideas.

“This approach to strategic planning tends to be found in entrepreneurial organisations which build on existing core capabilities”

People are hired and developed to contribute to the present and future organisational capabilities. Leaders are facilitators of idea generation. They lead through teamwork rather than through hierarchical administration. This approach to strategic planning tends to be found in entrepreneurial organisations which build on existing core capabilities even as they continually explore the creation of new internal capabilities.

The fourth approach: organisations in fast moving ecosystems
The fourth and final approach to strategic planning is likewise dynamic and highly engaging but rather than focusing on internal capabilities, the starting point of discussion is the requirement of the external ecosystem. The culture is externally focused, dynamic, and highly engaging. Large numbers of employees continually access and examine external information to develop the required internal capabilities. Elimination of vertical silos is a priority as people across the organisation prioritise, share and analyse external information.

“This approach will generally be found in companies in fast moving ecosystems with short cycle time products and services”

Performance management emphasises a balance of externally benchmarked results and behavioural indicators which encourage creativity and collaboration. Talent management requires individuals who are self-motivated and innovative and who encourage others to do the same. Leadership focuses on developing external awareness, openness to a continually changing external environment, and skills for engaging cross functional teams in identifying and leveraging external opportunities. This approach will generally be found in companies in fast moving ecosystems with short cycle time products and services.

3 strategic planning action items for HR
1. Understand the strategic planning process that is optimal for your company.
2. Ensure that your HR practices are designed to support your company’s approach to strategic planning.
3. Monitor effectiveness of your HR practices in supporting the planning and implementation of your company’s strategy

Organisational Design – Time for a Revisit?

After so much discussion these last years in the HR community about talent, leadership and technology, is organisational design now benefiting from a long-overdue renaissance of interest?  Last year, Deloitte’s Global Human Capital Trends Report highlighted “The Organization of the Future” as their top issue, while Dave Ulrich’s “Victory Through Organization” (2017) argued that organisational capability deserved far more attention given it has four times the impact on business results that talent has.  Faced by key challenges such as growing competition, the speed of digital change, and the need for greater enterprise flexibility, organisational design is therefore becoming more critical than ever before for success.

The growing interest in this topic was reflected by the high attendance at two recent Corporate Research Forum (CRF) events that presented their latest research report on “Designing Adaptable Organisations for Tomorrow’s Challenges”.   As a speaker at both events, together with Amy Kates (Kates Kesler Organization Consulting) and Gillian Pillans (CRF), it was a chance to hear how organisations in Europe are facing up to these challenges.  Some key takeaways for me were:

1. Organisations often reported good progress with getting benefits of scale (e.g. shared services, centralized centres of expertise) but more difficulty in maintaining agility, especially due to over-complex matrix models, and problems delivering sales through an omnichannel approach combining digital and bricks-and-mortar retail.

2. Given these constraints, and the unpredictable impact of future trends such as digital transformation, fresh approaches are being taken to organisation design including:

– applying more experimentation, fast learning and rapid redesign (shown in a case study of ING) in order to capitalise on the latest technology trends and opportunities

– moving away from “one size fits all” and embracing more diversity of organisational models (such as in Nestlé, which ranges from global businesses such as Nespresso to more local models for country-specific products)

– leveraging networks, and also overall organisational culture (such as in the case of Aviva), as means of fostering alignment rather than depending purely on reporting lines and hierarchies

– capitalizing on the power of analytics to pinpoint where there are organisational design issues, and using technology to trial-and-error designs rapidly before moving to implementation.

3. At the same time, concepts like the Galbraith Star model remain an essential part of the organisational design toolbox, although it’s important they are then followed through (e.g. covering issues like metrics, rewards and capabilities) and not just stopping at determining governance and processes, and are underpinned by effective change management support.

4. Despite the increasing importance of this topic, only 39% of those surveyed by CRF felt they had strong organizational design capability in their HR functions. The risk then is that HR is bypassed in these decisions and is confined to an implementation role.

The challenge, then, is how can HR leaders play a more value-added role in such decisions?  An obvious first step is to have a more informed point of view, leveraging the latest research and writing in this area, as well as networking with other practitioners grappling with such issues.  Secondly, HR can bring a lot of insight as they are often more aware than top teams may be of the “rubbing points” in organisations, which can be invaluable input for future designs. Thirdly, it’s about HR being ready to ask pertinent questions and to challenge stakeholders’ assumptions.  Finally, when the future direction is clearer, HR can play a facilitation role in enabling the co-creation of new designs by all the relevant stakeholders. By doing this, HR can be a more effective business partner and help build organisations that are more adaptable, future-ready and successful.

The fairness factor in performance management

Many systems are under stress because employees harbor doubts that the core elements are equitable. A few practical steps can change that.

The performance-management process at many companies continues to struggle, but not for lack of efforts to make things better. Of the respondents we surveyed recently, two-thirds made at least one major change to their performance-management systems over the 18 months prior to our survey. With growing frequency, human-resources departments are dispensing with unpopular “forced curve” ranking systems, rejiggering relatively undifferentiated compensation regimes, and digging deeply into employee data for clues to what really drives motivation and performance. (For a look at how Microsoft CEO Satya Nadella is innovating with a system that uses hard and soft performance measures to reshape the culture, see “Microsoft’s next act.”)

Yet companies don’t seem to be making much headway. Employees still complain that the feedback they get feels biased or disconnected from their work. Managers still see performance management as a bureaucratic, box-checking exercise. Half of the executives we surveyed told us that their evaluation and feedback systems have no impact on performance—or even have a negative effect. And certain experiments have gone awry: at some companies, eliminating annual performance reviews without a clear replacement, for example, has led employees to complain of feeling adrift without solid feedback—and some employers to reinstate the old review systems.

Amid ongoing dissatisfaction and experimentation, our research suggests that there’s a performance-management issue that’s hiding in plain sight: it’s fairness. In this article, we’ll explain the importance of this fairness factor, describe three priorities for addressing it, and show how technology, when used skillfully, can reinforce a sense of fairness.

The fairness factor

When we speak of fairness, we’re suggesting a tight definition that academics have wrestled with and come to describe as “procedural fairness.”1It’s far from a platonic ideal but instead addresses, in this context, the practical question of whether employees perceive that central elements of performance management are designed well and function fairly. This eye-of-the-beholder aspect is critical. Our survey research showed that 60 percent of respondents who perceived the performance-management system as fair also stated that it was effective.

More important, the data also crystallized what a fair system looks like. Of course, a host of factors may affect employee perceptions of fairness, but three stood out. Our research suggests that performance-management systems have a much better chance of being perceived as fair when they do these three things:

Such factors appear to be mutually reinforcing. Among companies that implemented all three, 84 percent of executives reported they had an effective performance-management system. These respondents were 12 times more likely to report positive results than those who said their companies hadn’t implemented any of the three (exhibit).

Among a host of factors that may affect employee perceptions of fairness in performance management, three stood out.

Our research wasn’t longitudinal, so we can’t say for sure whether fairness has become more important in recent years, but it wouldn’t be surprising if it had. After all, organizations are demanding a lot more from their employees: they expect them to respond quickly to changes in a volatile competitive environmentand to be “always on,” agile, and collaborative. As employers’ expectations rise and employees strive to meet them, a heightened desire for recognition and fairness is only natural. And while embattled HR executives and business leaders no doubt want to be fair, fairness is a somewhat vague ideal that demands unpacking.

Winning the battle of perceptions

In working with companies pushing forward on the factors our research highlighted, we have found that these require much greater engagement with employees to help them understand how their efforts matter, a lot more coaching muscle among busy managers, and some delicate recalibration of established compensation systems. Such shifts support a virtuous cycle that helps organizations get down to business on fairness.

1. Linking employees’ goals to business priorities

Building a foundation of trust in performance management means being clear about what you expect from employees and specific about how their work ultimately fits into the larger picture of what the company is trying to accomplish. Contrast that sense of meaning and purpose with the situation at many organizations where the goals of employees are too numerous, too broad, or too prone to irrelevance as events change corporate priorities but the goals of individuals aren’t revisited to reflect them. A typical ground-level reaction: “Managers think we aren’t sophisticated enough to connect the dots, but it’s obvious when our goals get disconnected from what really matters to the company.”

Give employees a say and be flexible. Connecting the dots starts with making employees at all levels feel personally involved in shaping their own goals. Mandating goals from the top down rarely generates the kind of employee engagement companies strive for. At a leading Scandinavian insurer, claims-processing operations were bogged down by surging backlogs, rising costs, and dissatisfied customers and employees. The company formed a working group of executives, managers, and team leaders to define the key areas where it needed to improve. Those sessions served as a blueprint: four overarching goals, linked to the problem areas, could be cascaded down to the key performance indictors (KPIs) at the business-unit and team level and, finally, to the KPIs of individual employees. The KPIs focused on operational measures (such as claims throughput and problem solving on calls), payout measures (like managing contractors and settlement closures), customer satisfaction, and employee morale and retention.

The company took a big further step to get buy-in: it allowed employees to review and provide feedback on the KPIs to assure that these fit their roles. Managers had observed that KPIs needed to vary even for employees in roles with seemingly similar tasks; phone calling for a targeted auto claim is different from skills needed to remedy damage to a factory. So the insurer gave the managers freedom to adjust, collaboratively, the KPIs for different roles while still ensuring a strong degree of consistency. A performance dashboard allowed an employee’s KPIs to be shared openly and daily with team members, making transparent both the teams’ overall progress and the efforts of motivated, top performers.

For the vast majority of traditional roles, this collaborative approach to KPI design is fairly straightforward. For more complex roles and situations—such as when tasks are deeply interdependent across a web of contributors—it can be more challenging to land on objective measurements. Such complex circumstances call for even more frequent feedback and for getting more rigorous about joint alignment on goals.

Adapt goals as often as needed. In today’s business environment, goals set at a high level in the strategy room are often modified in a few months’ time. Yet KPIs down the line are rarely adjusted. While we’re not suggesting that employees’ goals should become moving targets, they should certainly be revised in response to shifting strategies or evolving market conditions. Revisiting goals throughout the year avoids wasted effort by employees and prevents goals from drifting into meaninglessness by year-end, undermining trust. Of respondents who reported that their companies managed performance effectively, 62 percent said that those organizations revisit goals regularly—some on an ad hoc basis, and some twice a year or more. Managers must be on point for this, as we’ll explain next.

2. Teaching your managers to be coaches

Managers are at the proverbial coal face, where the hard work of implementing the performance requirements embodied in KPIs gets done. They also know the most about individual employees, their capabilities, and their development needs. Much of the fairness and fidelity of performance-management procedures therefore rests on the ability of managers to become effective coaches. Less than 30 percent of our survey respondents, however, said that their managers are good coaches. When managers don’t do this well, only 15 percent of respondents reported that the performance-management system was effective.

Start with agility. In a volatile business environment, good coaches master the flux, which means fighting the default position: goal setting at the year’s beginning ends with a perfunctory year-end evaluation that doesn’t match reality. At the Scandinavian insurer, team leaders meet weekly with supervisors to determine whether KPI targets and measures are in sync with current business conditions. If they aren’t, these managers reweight measures as needed given the operating data. Then, in coaching sessions with team members, the managers discuss and adjust goals, empowering everyone. Even when things aren’t in flux, managers have daily check-ins with their teams and do weekly team-performance roundups. They review the work of individual team members monthly. They keep abreast of the specifics of KPI fulfillment, with a dashboard that flashes red for below-average work across KPI components. When employees get two red lights, they receive written feedback and three hours of extra coaching.

Invest in capabilities. The soft skills needed to conduct meaningful performance conversations don’t come naturally to many managers, who often perform poorly in uncomfortable situations. Building their confidence and ability to evaluate performance fairly and to nudge employees to higher levels of achievement are both musts. While the frequency of performance conversations matters, our research emphasizes that their quality has the greatest impact.

One European bank transformed its performance-management system by holding workshops on the art of mastering difficult conversations and giving feedback to employees who are missing the ball. To ready managers for impending steps in the performance-management cycle, the bank requires them to complete skill-validation sessions, moderated by HR, with their peers. Managers receive guidance on how to encourage employees to set multiyear stretch goals that build on their strengths and passions. Just before these goal-setting and development conversations with employees take place, managers and peers scrum it out to test each other’s ideas and refine their messages.

Make it sustainable. At the European bank, the support sessions aren’t one-off exercises; they have become a central element in efforts to build a cadre of strong coaches. That required some organizational rebalancing. In this case, the bank restructured aspects of HR’s role: one key unit now focuses solely on enhancing the capabilities of managers and their impact on the business and is freed up from transactional HR activities. Separate people-services and solutions groups handle HR’s administrative and technical responsibilities. To break through legacy functional mind-sets and help HR directors think strategically, they went through a mandated HR Excellence training program.

The Scandinavian insurance company chose a different road, seeking to disseminate a stronger performance-management culture by training “champions” in specific areas, such as how to set goals aligned with KPIs. These champions then ran “train the trainer” workshops to spread the new coaching practices throughout the organization. Better performance conversations, along with a growing understanding of how and when to coach, increased perceived fairness and employee engagement. Productivity subsequently improved by 15 to 20 percent.

3. Differentiating compensation

Capable coaches with better goal-setting skills should take some of the pain out of aligning compensation—and they do to an extent. However, new organizational roles and performance patterns that skew to top employees add to the challenges. Incentives for traditional sales forces remain pretty intuitive: more effort (measured by client contacts) brings in more revenue and, mostly likely, higher pay. It’s harder to find the right benchmarks or to differentiate among top, middle, and low performers when roles are interdependent, collaboration is critical, and results can’t easily be traced to individual efforts. The only way, in our experience, is to carefully tinker your way to a balanced measurement approach, however challenging that may be. Above all, keep things simple at base, so managers can clearly explain the reasons for a pay decision and employees can understand them. Here are a few principles we’ve seen work:

Don’t kill ratings. In the quest to take the anxiety out of performance management—especially when there’s a bulge of middle-range performers—it is tempting to do away with rating systems. Yet companies that have tried this approach often struggle to help employees know where they stand, why their pay is what it is, what would constitute fair rewards for different levels of performance, and which guidelines underpin incentive structures. Just 16 percent of respondents at companies where compensation wasn’t differentiated deemed the performance-management system effective.

Dampen variations in the middle. With middle-of-the-pack performers working in collaborative team environments, it’s risky for companies to have sizabledifferences in compensation among team members, because some of them may see these as unfair and unwarranted. Creating the perception that there are “haves” and “have-nots” in the company outweighs any benefit that might be derived from engineering granular pay differences in the name of optimizing performance.

Cirque du Soleil manages this issue by setting, for all employees, a base salary that aligns with market rates. It also reviews labor markets to determine the rate of annual increases that almost all its employees receive. It pays middling performers fairly and consistently across the group, and the differences among such employees tend to be small. Managers have found that this approach has fostered a sense of fairness, while avoiding invidious pay comparisons. Managers can opt not to reward truly low performers. Cirque du Soleil (and others) have also found ways to keep employees in the middle range of performance and responsibilities whose star is on the rise happy: incentives that are not just financial, such as explicit praise, coaching, or special stretch assignments.

Embrace the power curve for standout performers. Research has emerged suggesting that the distribution of performance at most companies follows a “power curve”: 20 percent of employees generate 80 percent of the value. We noted this idea in a previous article on performance management and are starting to see more evidence that companies are embracing it by giving exceptional performers outsized rewards—typically, a premium of at least 15 to 20 percent above what those in the middle get—even as these companies distribute compensation more uniformly across the broad midsection.

At Cirque du Soleil, managers nominate their highest-performing employees and calibrate pay increases and other rewards. Top performers may receive dramatically more than middle and low performers. In our experience, employees in the middle instinctively get the need for differentiation because it’s no secret to them which of their colleagues push the needle furthest. Indeed, we’ve heard rumblings about unfair systems that don’t recognize top performers. (For a counterpoint to radical performance differentiation, see “Digging deep for organizational innovation,” forthcoming on McKinsey.com, where Hilcorp CEO Greg Lalicker explains how the oil and gas producer sets exacting production standards and then—if they’re met—gives every employee a power-curve bonus.)

Innovate with spot bonuses. Recognizing superior effort during the year can also show that managers are engaged and that the system is responsive. Cirque du Soleil rewards extraordinary contributions to special projects with a payment ranging from 2 to 5 percent of the total salary, along with a letter of recognition. In a recent year, 160 of the company’s 3,500 employees were recognized. Spot bonuses avoid inflating salary programs, since the payments don’t become part of the employee’s compensation base.

Technology’s role

Digital technologies are power tools that can increase the speed and reach of a performance-management transformation while reducing administrative costs. They’re generally effective. Sixty-five percent of respondents from companies that have launched performance-related mobile technologies in the past 18 months said that they had a positive effect on the performance of both employees and companies. A mobile app at one global company we know, for example, makes it easier for managers and employees to record and track goals throughout the year. Employees feel more engaged because they know where they stand. The app also nudges managers to conduct more real-time coaching conversations and to refine goals throughout the year.

Does technology affect perceptions of fairness? That depends on how it’s applied. When app-based systems are geared only to increase the efficiency of a process, not so much. However, when they widen the fact base for gauging individual performance, capture diverse perspectives on it, and offer suggestions for development, they can bolster perceived fairness. We have found that two refinements can help digital tools do a better job.

Sweat the small stuff

In an attempt to move away from a manager-led performance system, German e-commerce company Zalando launched an app that gathered real-time performance and development feedback from a variety of sources. The company tested behavioral “nudges” and fine-tuned elements of the app, such as its scoring scale. Yet it found that the quality of written development feedback was poor, since many employees weren’t accustomed to reviewing one another. The company solved this problem redesigning the app’s interface to elicit a holistic picture of each employee’s strengths and weaknesses, and by posing a direct question about what, specifically, an employee could do to stretch his or her performance. The company also found that feedback tended to be unduly positive: 5 out of 5 became the scoring norm. It did A/B testing on the text describing the rating scale and included a behavioral nudge warning that top scores should be awarded only for exceptional performance, which remedied the grade inflation.

Separate development from evaluative feedback

Digitally enabled, real-time feedback produces a welter of crowdsourced data from colleagues, and so does information streaming from gamified problem-solving apps. The data are powerful, but capturing them can trigger employees’ suspicions that “Big Brother is watching.” One way to address these fears is to distinguish the systems that evaluate employees from those that help them develop. Of course, it is tempting to make all the data gathered through these apps available to an employee’s manager. Yet when employees open themselves to honest feedback from their colleagues about how to do their jobs better, they’re vulnerable—particularly if these  development data are fed into evaluation tools. That also undercuts the purpose (and ultimately the benefits) of digitally enabled feedback. Apps should be designed so that employees can decide which feedback they ought to share during their evaluations with managers.

To broaden adoption of the system, Zalando stressed that the app was to be used only for development purposes. That helped spur intense engagement, driving 10,000 users to the app and 60,000 trials in the first few months. Employees reacted positively to sharing and evaluating data that would help them cultivate job strengths. With that base of trust, Zalando designed a performance dashboard where all employees can see, in one place, all the quantitative and qualitative feedback they have received for both development and evaluation. The tool also shows individuals how their feedback compares with that of the average scores on their teams and of people who hold similar jobs.

The many well-intentioned performance-management experiments now under way run the risk of falling short unless a sense of fairness underpins them. We’ve presented data and examples suggesting why that’s true and how to change perceptions. At the risk of oversimplifying, we’d also suggest that busy leaders striving to improve performance management listen to their employees, who have a pretty good idea about what fair looks like: “Just show us the link between what we do and what the company needs, make sure the boss gives us more coaching, and make it all pay.” In our experience, when leaders understand, address, and communicate about the issues at this level, employees see performance management as fair, and the reform efforts of their companies yield better results.

Linking talent to value

Getting the best people into the most important roles does not happen by chance; it requires a disciplined look at where the organization really creates value and how top talent contributes.

To understand how difficult it is for senior leaders to link their companies’ business and talent priorities, consider the blind spot of a CEO we know. When asked to identify the critical roles in his company, the CEO neglected to mention the account manager for a key customer, in part because the position was not prominent in any organization chart. By just about any other criterion, though, this was one of the most important roles in the company, critical to current performance and future growth. The role demanded a high degree of responsibility, a complex set of interpersonal and technical skills, and an ability to respond deftly to the client’s rapidly changing needs.

Yet the CEO was not carefully tracking the position. The company was unaware of the incumbent’s growing dissatisfaction with her job. And there was no succession plan in place for the role. When the incumbent account manager, a very high performer, suddenly took a job at another company, the move stunned her superiors. As performance suffered, they scrambled to cover temporarily, and then to fill, a mission-critical role.

Disconnects such as this between talent and value are risky business—and regrettably common. Gaining a true understanding of who your top talent is and what your most critical roles are is a challenging task. Executives often use hierarchy, relationships, or intuition to make these determinations. They assume (incorrectly, as we will explain) that the most critical roles are always within the “top team” rather than three, or even four, layers below the top. In fact, critical positions and critical people can be found throughout an organization (Exhibit 1).

Roles that drive or enable value can be found across an organization.

Fortunately, there is a better way. Companies can more closely connect their talent and their opportunities to create value by using quantifiable measures to investigate their organizations’ nooks and crannies to find the most critical roles, whether they lie in design, manufacturing, HR, procurement, or any other discipline. They can define those jobs with clarity to ensure that top performers with the appropriate skills fill the roles. And they can put succession plans in place for each one.

The leaders at such companies understand that reallocating talent to the highest-value initiatives is as important as reallocating capital. This is not an annual exercise: it is a never-ending, highest-priority discipline. In a survey of more than 600 respondents, we found the talent-related practice most predictive of winning against competitors was frequent reallocation of high performers to the most critical strategic priorities. In fact, “fast” talent reallocators were 2.2 times more likely to outperform their competitors on total returns to shareholders (TRS) than were slow talent reallocators.1

Those results are consistent with the experience of Sandy Ogg, founder of CEOworks, former chief HR officer (CHRO) at Unilever, and former operating partner at the Blackstone Group. While in the latter role, Ogg began paying attention to which Blackstone investments made moves to match the right talent to the important roles from the start. He observed that 80 percent of those talent-centric portfolio companies hit all their first-year targets and went on to achieve 2.5 times the return on initial investment. Ogg also noted that the 22 most successful portfolio companies out of the 180 he evaluated managed their talent decisions with an eye toward linking critical leadership roles to the value they needed to generate. He recalled using similar value-centric talent-management approaches in his previous roles at Motorola, Unilever, and Blackstone, and he now had even clearer evidence of their impact. In partnership with McKinsey, he set out to codify this approach for linking talent to value.

Real-world examples best describe our learnings. In this article, we describe the journey of a CEO of a consumer-products company, “Company X,” who recently found herself reflecting on how to achieve dramatic revenue growth. The effort would demand reimagining how Company X generated value and then redefining critical roles and the people who filled them.

Define the value agenda

The first step in linking talent to value is to get under the hood of a company’s ambitions and targets. It is not enough just to know the overall numbers—the aspiration should be clearly attributable to specific territories, product areas, and business units. Company X already understood its overriding goal: to grow revenue by 150 percent within the next five years in its highly disrupted industry. When taking a more detailed look, however, the CEO and her team found that some small business units were likely to grow out of proportion to their size, making the value at stake in these businesses greater than in the larger ones. Design and manufacturing innovation would clearly have a positive impact on all business units, but if the two largest ones were to grow, they would also have to take advantage of international opportunities and digitally deliver their products and services.

Disaggregating value in this granular fashion set the table for a strategic discussion about which roles mattered most and about the skills and attributes needed by the talent who would fill those roles and drive future growth. Even at this early stage of the process, it was clear that the company’s future leaders would need to be comfortable in an international environment, leading teams with a high degree of cultural diversity; have experience in cutting-edge design and manufacturing processes; and possess digital fluency. The leaders would also have to be flexible and comfortable adapting to unforeseen disruptions.

Unfortunately, these character traits were not common across Company X’s cadre of leaders at the time. The CEO now understood the serious issue she had to confront—the profiles of Company X’s current top talent did not necessarily match the ideal profiles of its future top talent.

Identify and clarify critical roles

Identifying and quantifying the value of the most important roles in an organization is a central step in matching talent to value. These critical roles generally fall into two categories: value creators and enablers. Value creators directly generate revenue, lower operating costs, and increase capital efficiency. Value enablers, such as leaders of support functions like cybersecurity or risk management, perform indispensable work that enables the creators. These roles are often in counterintuitive places within the organization. Typically, companies that consciously set out to pinpoint them find about 60 percent are two layers below the CEO, and 30 percent are three layers or more below the CEO.

The ability to achieve true role clarity is closely tied to overall organizational performance and health, according to McKinsey research. In the pursuit of such clarity, it is critical to think first about roles rather than people. The initial goal is assessment of where the greatest potential value is and what skills will be necessary to realize that value—not identification of the top performers. This approach allows leaders to think more strategically about matching talent and value rather than merely focusing on an individual’s capabilities.

Each of Company X’s business-unit leaders had defined their value agenda; now they needed to map, in collaboration with their HR teams, the most critical roles. In each unit, leaders addressed the following series of questions:

Then they went into even more detail. They mapped potential financial value to each role using the metric of projected five-year operating margin. Value creators were assigned the full economic value of their business’s operating margin. Value enablers were assigned a percentage of value based on human judgment of their relative contribution to the relevant operating margin combined with an analytic perspective on which value levers those functions influenced.

Through this fact-based process, leaders identified more than 100 critical roles across all business units and corporate functions. In line with our experience, 20 percent were three layers or more below the CEO, often in counterintuitive places. More than 10 percent of the critical roles focused on digital priorities, advanced analytics, and other capabilities in very short supply in the current organization. About 5 percent focused on cross-functional integration. And at least 20 percent were entirely new or greatly evolved in scope.

The CEO, CHRO, and CFO sifted through the list to identify the 50 highest-value roles (for more on collaboration opportunities for these three executives, see “An agenda for the talent-first CEO”). The choice of 50 was not because it is a nice, round number. It is hard for a CEO to have clear visibility into more than about 50 roles. Also, in our experience, the top 25 to 50 roles can typically orchestrate the bulk of a company’s potential value. The hiring, retention, performance management, and succession planning in these critical roles should all be of personal interest to the CEO.

The company’s top managers then worked with business-unit leaders to create unique “role cards” for these top positions. Each card specified the role’s mission; a list of jobs to be done, with a checklist of what was needed to capture the role’s outsized share of value; and key performance indicators (KPIs). The KPIs were quite detailed. For instance, the KPIs assigned to the role of the general manager for one site were percent of on-time delivery, product- and account-specific earnings, percent share of spot volume, and share of volume from new customers. Creating such specific KPIs allowed leaders to articulate objectively the role’s requirements, such as extensive sales and negotiation experience, demonstrated financial acumen, proven results as a strong team leader, experience in a corporate staff function, and a history of profit-and-loss ownership in a manufacturing setting. This objective articulation of requirements enabled both a fact-based assessment of incumbents in the role and a clear set of criteria against which to select new general managers.

Role identification and clarification is a process that works with any kind of organizational structure, including those based on agile principles. In fact, the potential rewards of value-based role clarity might even be greater in agile organizations, because flatter organizations build themselves around the principle that empowered talent in the right roles is the key to unlocking value. Pinpointing where a critical role sits in an organization chart is not important. What matters is knowing the potential outcomes of any given role, anywhere in the organization.

Match talent to roles

Business leaders at Company X next turned to the job of finding the right people for the more clearly defined critical roles. Their search process was more efficient and effective than those associated with traditional “high potential” talent reviews thanks to two types of benefits that generally emerge from taking a more rigorous approach.

First, the articulation of value and roles for Company X allowed for objective comparisons between candidates across a variety of specific dimensions rather than relying on subjective hunches or a perfunctory succession plan. When a company uses such an approach, the talent-selection process becomes an evaluation of specific evidence. The CFO of a business unit that aims to increase value through a strategy of acquisitions, for example, should have a different background and experience base from the CFO of an organization that aims to increase value through aggressive cost reduction.

Second, the specificity of role requirements for Company X encouraged a more objective view of incumbent managers. Rigorously assessing incumbents against value-linked role requirements typically leads a company to realize that 20 to 30 percent of those in critical roles are not well matched. The data-driven process makes it hard to ignore the uncomfortable realizations that some incumbents might not be up to the future demands of the job and that leaving them in place would put a significant amount of value at risk.

Over time, some organizations come up against a happy problem: unexpected value that was not part of the strategic plan starts emerging. For instance, a product might enjoy a serendipitous viral uptake or a new service might enable the delivery of breakthrough customer experiences that shake up the competitive balance. Fortuitous, big moves such as these, which both reflect and necessitate strategic flexibility, also reinforce the power of linking talent to value (for more on what it takes to make breakout moves, see “Eight shifts that will take your strategy into high gear,” forthcoming on McKinsey.com).

How so? For starters, once a new source of value becomes clear, the company’s understanding of its value agenda can shift to mine the potential of this new source—a move accompanied by a corresponding shift in the company’s talent priorities. For example, a senior vice president of supply chain might have been reliable for years, but can he or she quickly activate the new set of reliable suppliers needed to get that unexpectedly hot product from R&D into the market as soon as possible? The discipline of understanding the requirements of key roles throughout a company helps give the CEO the agility to respond to such questions with alacrity.

The concept of matching talent to value is often a precursor to breakthroughs. These innovations commonly occur in contexts deliberately set up to enable them. Consider Tesla’s effort to create a culture of fast-moving innovation, Apple’s obsessive user-experience focus, and Corning’s goal of easing “barriers to creativity and serendipitous advances.” These cultural priorities are at the core of these companies’ value agendas. The roles created to turn such priorities into value are often related to R&D (such as the chief technical officer, chief design officer, and chief technologist) and filled with talented, creative people, such as Apple’s Jony Ive, who thrive in the freedom of those particular roles.

The linking-talent-to-value process at Company X did more than just put the best people in critical roles. As the CEO tried to match the company’s existing talent to these roles, she and other leaders realized that the company needed to retool its leadership development. Future leaders would have to develop the expertise (such as global line management or cross-functional collaboration) that would be high priorities in the new roles. Furthermore, these new leaders would need the mind-set and determination to accelerate breakthrough innovation. As often happens, the rigorous effort to match talent to value led the company’s top executives to a deeper understanding of their business.

Operationalize and mobilize

Linking talent to value is not a process that stops when roles are identified and matched to the appropriate top talent. To garner the expected value, leaders must manage these roles as assiduously as they do capital investments and use real-time critical metrics. An HR-leadership team might meet monthly to identify trends across business units—for example, the lag of certain role-specific KPIs, such as digital fluency. Working alongside business leaders, the team might also assess changes in the performance of individuals in critical roles, asking questions such as, “Is this individual delivering the value expected? What interventions (for instance, coaching or better-aligned incentives) can support this individual?” The leadership team might even meet daily or weekly to manage real-time talent crises, such as a moment when people-analytics software identifies an immediate risk of attrition in a critical role.

Companies must also examine whether the HR team is up to the task of managing talent as rigorously as the finance team deploys financial capital. The following questions can help make this determination:

At one company that exemplifies the necessary rigor for matching talent to value, the HR team plans to develop semiautomated data dashboards that track the most important metrics for critical roles. Each critical role will have a customized dashboard to trace progress on relevant operational and financial KPIs (for example, segmented earnings before interest, taxes, depreciation, and amortization) against development activities (for instance, an instructional course). The metrics will tie to back-end organizational data, resulting in a mixture of automated and manual updating. The HR leadership team is learning how to use these dashboards to engage business leaders in regular talent reviews. Such a data-driven and technologically enabled review should ensure that the HR group provides targeted support through value-centered talent management.

Company X’s CEO knows that her job is not complete. Talent and overall strategic planning must have a tighter link. Talent evaluation must be constant rather than sporadic. Her organization must learn to flex its new muscle linking talent to value continuously. At her company and every company, the set of critical roles is dynamic rather than a “one and done” process—it must be reevaluated each time strategic imperatives change. Talent management must become a frequent, agile process in which the CEO and executive-leadership team participate as actively as they do in financial-investment decisions. In the survey mentioned earlier of more than 600 respondents, we found that in a majority of companies identified as fast talent allocators, top business leaders met at least quarterly to review talent placement (Exhibit 2).

About half of the companies identied as fast talent allocators review talent placement at least quarterly.

Even though its talent-to-value effort is a work in progress, Company X is better positioned than ever to achieve aggressive growth aspirations. Its ambitious plans have a much better chance of succeeding now that the company’s leaders have done the difficult work of identifying where future value is at risk and mitigating that risk through more value-centric talent management. They are augmenting their strategic vision with a clear understanding of the kinds of leaders they will need to meet their goals. This kind of proactive linkage of talent to value must be the new normal for business leaders.