Topgrading the organization.

• Author: Smart, Bradford D.

Because of its impact on shareholder value, building a talent advantage over your competitors must be the number-one priority of board members and senior management.

In the face of increasing international and domestic competition, two CEOs attempt to improve their company's performance. Both have read all of the books on the latest management trends. Both have worked with their boards to craft a winning strategy. One CEO succeeds and receives accolades from shareholders and customers. However, the other one feels the intense frustration of failing to implement the strategy because of a lack of employee horsepower. Shareholder value continues to rise in the first case, and continues to be destroyed in the second.

After witnessing literally thousands of successful and failed executive careers, we have one question to ask directors and senior managers who want to improve their company's short-term and long-term performance: "Is your company's talent creating or destroying shareholder value?" The fundamental driver of shareholder value is the talent of everyone in the organization on whom you rely to implement your business strategies. This conclusion is based on a large-scale research base of 4,204 executives in 123 companies.

We coin the term "topgrading" to describe the practice we observe of not only finding, hiring, and promoting better people at all levels (that would be upgrading) - but proactively hiring and promoting only the most talented people available, while sensitively but aggressively removing chronic underperformers. This helps companies build a talent advantage over their competitors. It is as if these organizations can boast, "Our sales people are more motivated and effective than your sales people. Our engineers are smarter than your engineers. Our officers are better leaders than your officers."

Paradoxically, organizations that topgrade do not necessarily pay more for talent. Companies that topgrade tend to look harder to find talent, screen harder to select the right people, and act more quickly to confront nonperformance. In relation to their competitors, these companies get disproportionately better talent for the compensation dollars they spend.

Building a talent advantage over your competitors does not happen without a high degree of focus and energy. Topgrading the organization must be a top priority of board members and senior management. If it is not a priority, then hiring the best and brightest is just given lip service. We estimate that less than 5% of U.S. companies are topgrading. As Peter Drucker said to us one time, "The toughest decisions in organizations are people decisions - hiring, promoting, firing, etc. The ability to make good decisions regarding people represents one of the last reliable sources of competitive advantage since very few organizations are very good at it."

We wince every time an undertalented company tries to implement TQM or some other initiative and push decisionmaking responsibility down in the organization. Underskilled or undertalented employees are given decisionmaking authority and end up making bad decisions. Performance inevitably suffers.

In contrast, organizations that topgrade are able to drive improvements or changes in strategic value drivers such as productivity, innovation, quality, customer service, and time to market. They experience greater success in these areas because they have the most competent employees on whom to rely. Having consistently strong operational performance can be a powerful force in building shareholder value. Of course, other factors such as macroeconomic trends, currency fluctuations, industry changes, and customer preferences can all affect shareholder value as well.

We are not saying talent is the only driver of shareholder value, but that it is a key one - and one of the only ones that senior managers can directly control. Ratcheting up the talent level of a company is a lot easier than trying to affect the strength of the U.S. dollar.

The idea behind topgrading is so simple, we are often shocked that so few companies do it. We have found that far too often, managers at all levels make the costly mistake of trying to "manage their way" to excellence with low-performers on their team.

This article provides a framework for illustrating how topgrading is a primary driver of shareholder value. In addition, the six most common organizational obstacles to implementing the practice of topgrading are identified. Finally, several brief case examples illustrate how some of this nation's most successful companies develop and maintain this powerful competitive advantage.

Talent counts

In the 1992 and 1996 Olympic Games, the American basketball Dream Team had no problem crushing its competitors. What was the primary source of its competitive advantage? Better strategic thinking? Better business processes? Was the team a learning organization? Was it the team's commitment to embrace change and innovation?

No. The dream team's fundamental competitive advantage was clearly the talent. All other advantages flowed from this primary driver of performance. The team was comprised of high-performers, or A players. There were almost no B players and certainly no C players to drag the organization's talent level down.

AlliedSignal's Chairman and CEO Larry Bossidy is a believer that nothing his company does is more important than hiring and developing the right people. He contends that strategies are intellectually simple but the success of strategy implementation depends on who is doing the implementing.

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