This blog will make some readers unhappy. It will argue adamantly against “the way it really works in this company,” it will challenge their long-held beliefs and “what their boss always told them” about how talent management and compensation are supposed to work. That’s good, and it’s about time.

Let’s start with the problem, or “the way it really works” in many companies: Leadership too often views people as commodities while viewing compensation as an expense to be minimized. Both perspectives are diametrically wrong. They have damaged people’s careers, ruined promising teams and projects, and restrained operational effectiveness for years.

Hiring top talent in today’s labor market requires an entirely different way of thinking. Opposite, in fact.

exceptionalIn her outstanding article “How to Hire” published in the Harvard Business Review earlier this year, Patty McCord (former Chief Talent Officer at Netflix) effectively makes these points over and over with real examples from her tenure at Netflix. While at least one of her tactics fails to resonate with yours truly, the main themes and perspectives evidenced in her article are absolutely on point.

Here is the proper perspective – the part where Exceptional Thinking comes in:

People are not commodities.

Some possess incredible talent, drive, knowledge and abilities that far surpass those of their peers, while some (to put it kindly) do not. The differences between these two types can be measured in orders of magnitude, as can their actual contribution to key organizational outcomes. The list of examples I could personally cite are extensive, but McCord’s article has plenty.

We know this instinctively and from first-hand experience in the workplace. But when it comes to how most companies manage talent, this insight immediately evaporates. It’s often replaced with the absurd (yet common) managerial premise that everyone in a given job classification is essentially equivalent. One can be exchanged for another, with no impact on business outcomes. No, they can’t.

Leaders can become lost in succession planning meetings when evaluating the potential contribution and success profile for VP-level talent. Imagine their keen interest in understanding the essential role that Engineer A plays in Project X, which will yield huge operational improvements and generate a 15% increase in ROI. Hey, an Engineer is an Engineer, right? We’ll just get another one, no problem.

Compensation should be optimized rather than minimized.

The critical aspect of compensation is the relationship between investment in people and the organizational outcomes generated by the people who receive that pay…not the actual compensation rate itself.

Put far too simply, if we can achieve output valued at $10 by spending $5 more on compensation, then we should make that investment. There’s a point of diminishing return, of course, but when the equation is positive, good things happen for employees and for the company (hey, the investors will love it!). But wait – that cost will hit this quarter’s numbers! Forget it.

This also works in reverse. Perhaps we can lower our wages by $5 and save capital (hey, the investors will love it!) but we achieve the unintended consequence of lowering output value by $10. But hey, that won’t hit this quarter’s numbers, so it’s all good. Who cares about lost output if the quarter looks better.

Illustrating this perspective

So back to Patty McCord’s article. Let’s look at one of many, many great examples that illustrate the insight and wisdom of this perspective, then on to how this exceptional approach impacts recruiting!

Here’s one “real-life” story taken directly from her article, no context needed.

People often tell me, “We can’t pay top dollar. That was great for Netflix, because the company was booming. But we’re not growing that way, and we don’t have the margin.”

Fair enough. Maybe it’s not possible to pay top of market for every position. In that case I suggest identifying the positions with the greatest potential to boost your performance and paying top dollar to fill them with the very best people you can get.

Think about it this way: What if by paying top of market you could bring in one supremely talented person who could do the job of two people or add even more value than that? Consider the 80/20 rule about sales teams: that 20% of your salespeople will generate 80% of your revenue. It may apply to other employees. I’ve seen a similar effect on team after team.

Another example:

Another objection I often hear to hiring star performers at top pay is that their salaries will be much higher than those of their teammates. Managers at Netflix used to complain about that.

Say we wanted to bring in someone whose salary would be twice that of everybody else on the team. Department heads would sometimes ask, “Does that mean I’m paying people half of what they’re worth?”

I’d say, “Well, is this new person going to be able to move us faster, maybe even twice as fast? And when we hire him, who on your team could take his place at his former company?” The answers were usually “Yeah, we’ll be able to move much faster” and “None of them could replace him, because they don’t have his experience.” 

And one final story:

 I recently got a call from a CEO whose company employs 150 people. He said it would be growing to 300 and asked my advice on getting there. I said, “That’s a precise number of people. What’s it based on?” He said his company would need to do twice as much work. (skipping ahead…)

Then I asked the question I’ve found to be the most thought-provoking in these consultations: “Instead of 150 new people, are you sure you don’t want 75 people whom you pay twice as much because they have twice as much experience and can be higher performers?”

Here’s the vital point that ties all of this back neatly to recruiting:

When we think of candidates as commodities and want to hire someone at the lowest salary they’ll accept, everyone loses. When we understand the true value of hiring top talent, the salary level becomes far less important than what that person can enable us to achieve.

In key positions, truly exceptional talent makes a truly exceptional difference in the company, and the highest (reasonable) salary it takes to hire that top talent will be more than offset by their contribution.

Define the right profile. Source, evaluate, and select effectively and quickly. We can help you there.

Pay what it takes to get the person matching your profile, get them onboard and watch the magic happen. Or, watch the other guys do it and enjoy your popcorn from the bleachers.