The battle for brainpower - The Economist · 2017-12-06 · 1 2 A survey of talent The Economist October 7th 2006 2 former masters of the universe were beg- ging for work. Indeed,

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A survey of talent l October 7th 2006

The battle for brainpower

Talent has become the world’s most sought-after commodity, saysAdrian Wooldridge. The shortage is causing serious problems

research and executive education based inWashington, DC, recently conducted an in-ternational poll of senior human-re-sources managers, three-quarters of themsaid that �attracting and retaining� talentwas their number one priority. Some 62%worried about company-wide talentshortages (see chart 1 on the next page).The Ceb also surveyed some 4,000 hiringmanagers in more than 30 companies, andwas told that the average quality of candi-dates had declined by 10% since 2004 andthe average time to �ll a vacancy had in-creased from 37 days to 51 days. More thanone-third of the managers said that theyhad hired below-average candidates �justto �ll a position quickly�. The Ceb found,too, that about one in three employees hadrecently been approached by another �rmhoping to lure them away.

Can’t get enough of itAll this brings back memories of the dot-com boom in the late 1990s, when man-agement consultants were writing bookssuch as �The War for Talent� (by Ed Mi-chaels, Helen Hand�eld-Jones and BethAxelrod of McKinsey), telling companiesthat they must move heaven and earth torecruit and promote the best talent. Nosooner had the bubble burst than many

The Economist October 7th 2006 A survey of talent 1

1

IN A speech at Harvard University in 1943Winston Churchill observed that �the

empires of the future will be empires ofthe mind.� He might have added that thebattles of the future will be battles for tal-ent. To be sure, the old battles for naturalresources are still with us. But they are be-ing supplemented by new ones for talent�not just among companies (which arecompeting for �human resources�) butalso among countries (which fret aboutthe �balance of brains� as well as the �bal-ance of power�).

The war for talent is at its �ercest inhigh-tech industries. The arrival of an ag-gressive new superpower�Google�hasmade it bloodier still. The company has as-sembled a formidable hiring machine tohelp it �nd the people it needs. It has alsoexperimented with clever new recruitingtools, such as billboards featuring compli-cated mathematical problems. Other techgiants have responded by superchargingtheir own talent machines (Yahoo! hashired a constellation of academic stars)and suing people who suddenly leave.

But a large and growing number ofbusinesses outside the tech industry�from consulting to hedge funds�also runon brainpower. When the Corporate Exec-utive Board (CEB), a provider of business

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Acknowledgments The author is grateful to the followingorganisations for sharing their expertise on this subject:Harvard Business School, McKinsey, Boston ConsultingGroup and Deloitte. He owes a particular debt to PeterFreire and his colleagues at the Corporate Executive Board. Two books proved especially helpful: �Flight Capital: theAlarming Exodus of America’s Best and Brightest�, by Da-vid Heenan; and �Competing for Global Talent�, edited byChristiane Kuptsch and Pang Eng Fong.

Everybody’s doing itCompanies of all stripes have become awareof the need to gather talent. Page 3

The world is our oysterThe talent war has gone global�and so havetalent shortages. Page 5

Opening the doorsGovernments are joining in the hunt fortalent. Page 6

Nightmare scenariosWestern worries about losing jobs and talentare only partly justi�ed. Page 8

Masters of the universeThe war for talent is shifting the balance ofpower from companies to workers. Page 10

The revenge of the bell curveAs talent becomes more valuable, inequal-ities are widening. Page 11

Meritocracy and its discontentsNot everybody is happy with the talent elite.Page 13

The battle for brainpower

1

2 A survey of talent The Economist October 7th 2006

2 former masters of the universe were beg-ging for work.

Indeed, companies do not even knowhow to de�ne �talent�, let alone how tomanage it. Some use it to mean people likeAldous Huxley’s alphas in �Brave NewWorld��those at the top of the bell curve.Others employ it as a synonym for the en-tire workforce, a de�nition so broad as tobe meaningless.

Nor does stocking up on talent seem toprotect companies from getting it spectacu-larly wrong. Enron did everything that MrMichaels and his colleagues recom-mended (indeed, McKinsey was both aconsultant and a cheerleader for the Hous-ton conglomerate). It recruited the best andthe brightest, hiring up to 250 MBAs a yearat the height of its fame. It applied a �rank-and-yank� system of evaluation, shower-ing the alphas with gold and sacking thegammas. And it promoted talent muchfaster than experience. Another corporatedisaster, Long Term Capital Management,was even more talent-heavy than Enron,boasting not only MBAs but Nobel prize-winners among its sta�. But despite all thistalent, the companies still succumbed togreed and mismanagement.

The coming shortageClearly there is more to good managementthan hiring the best and the brightest.Among other things, it requires rewardingexperience as well as talent, and applyingstrong ethical codes and internal controls.Indeed, talent-intensive businesses have aparticular interest in maintaining high eth-ical standards. Whereas in manufacturingindustries a decline in such standards is of-ten slow, in talent-intensive ones it can beterrifyingly sudden, as Arthur Andersenand Enron found to their cost.

All the same, structural changes aremaking talent ever more important. Thedeepest such change is the rise of intangi-ble but talent-intensive assets. Baruch Lev,a professor of accounting at New York Uni-versity, argues that �intangible assets��ranging from a skilled workforce to patentsto know-how�account for more than halfof the market capitalisation of America’spublic companies. Accenture, a manage-ment consultancy, calculates that intangi-ble assets have shot up from 20% of thevalue of companies in the S&P 500 in 1980to around 70% today.

McKinsey makes a similar point in adi�erent way. The consultancy has di-vided American jobs into three categories:�transformational� (extracting raw materi-als or converting them into �nished

goods), �transactional� (interactions thatcan easily be scripted or automated) and�tacit� (complex interactions requiring ahigh level of judgment). The company ar-gues that over the past six years the num-ber of American jobs that emphasise �tacitinteractions� has grown two and a halftimes as fast as the number of transact-ional jobs and three times as fast as em-ployment in general. These jobs now makeup some 40% of the American labour mar-ket and account for 70% of the jobs createdsince 1998. And the same sort of thing isbound to happen in developing countriesas they get richer.

A second change is the ageing of thepopulation. This will be most dramatic inEurope and Japan: by 2025 the number ofpeople aged 15-64 is projected to fall by 7%in Germany, 9% in Italy and 14% in Japan.But it will also make a di�erence to China,thanks to its one-child policy. And even inAmerica, where the e�ect will be lessmarked, the retirement of the baby-boom-ers (which has just started) means thatcompanies will lose large numbers of ex-perienced workers over a short period.RHR International, a consultancy, claimsthat America’s 500 biggest companies willlose half their senior managers in the next�ve years or so, when the next generationof potential leaders has already been deci-mated by the re-engineering and down-sizing of the past few decades. At the top ofthe civil service the attrition rate will beeven higher. This means that everyonewill have to �ght harder for young talent,as well as learning to tap (and manage)new sources of talent.

At the same time loyalty to employers isfading. Thanks to all that downsizing, theold social contract�job security in returnfor commitment�has been breakingdown, �rst in America and then in othercountries. A 2003 survey by the Society forHuman-Resource Management suggestedthat 83% of workers were �extremely� or�somewhat� likely to search for a new jobwhen the economy recovered.

As well as becoming more footloose,the workforce is becoming less standar-dised. Today employees come in all shapesand sizes. Some 16% of American workerstelecommute some of the time. A quarterof the sta� at B&Q, a British DIY chain, areover 50; the oldest is 91. And these diverseworkers are often part of a global supplychain that keeps going 24 hours a day.Managers not only need to deal with lotsof di�erent sorts of people, but also tomanage workers in di�erent countries andoften across di�erent functions. Thatmeans even more competition for peoplewith up-to-date management skills.

Obsession with talent is no longer con-�ned to blue-chip companies such asGoldman Sachs and General Electric. Itcan be found everywhere in the corporateworld, from credit-card companies to hotelchains to the retail trade. Many �rmsreckon that they have pushed re-engineer-ing and automation as hard as they can.Now they must raise productivity by man-aging talent better.

With opportunities at home runningdry, the hunt for talent has gone global.Over the past decade multinational com-panies have shipped back-o�ce and IT op-erations to the developing world, particu-larly India and China. More recently theyhave started moving better jobs o�shore aswell, capitalising on high-grade workerswith local knowledge; but now they arebumping up against talent shortages in thedeveloping world too.

Even governments have got the talentbug. Rich countries have progressed fromsimply relaxing their immigration laws toactively luring highly quali�ed people.Most of them are using their universities asmagnets for talent. India and China are try-ing to entice back some of their brightestpeople from abroad. Singapore’s Ministryof Manpower even has an internationaltalent division.

The dark sideCompetition for talent o�ers many bene-�ts�from boosting productivity to increas-ing opportunities, from promoting job sat-isfaction to supercharging scienti�cadvances. The more countries and compa-nies compete for talent, the better thechances that geniuses will be raked upfrom obscurity.

But the subject is strewn with land-mines. Think of the furore that greetedCharles Murray’s and Richard Herrn-stein’s book �The Bell Curve�, which ar-gued that there are di�erences in the aver-age intelligence of di�erent racial groups;

1Not enough to go round

Source: Corporate Executive Board, Corporate Leadership Council

Talent shortages in organisations, %

60 65 70 75 80 85

Growth markets

Specialised skills

Business leaders

Across the organisation

THERE is nothing new about companieswanting to secure the best talent. The

East India Company, founded in 1600,used competitive examinations to recruitalpha minds. The company’s employeesincluded James and John Stuart Mill, twoof Britain’s greatest intellectuals, andThomas Love Peacock, one of its wittierwriters. General Electric (GE) carefullyranks its employees, with the bestgroomed for leading positions and theweakest eased out. In the mid-1950s itlaunched its corporate university at Cro-tonville near New York, often dubbed Har-vard-on-the-Hudson. Jack Welch, the com-pany’s legendary boss, spent half his timeon �people development� and visited Cro-tonville every two weeks. As for invest-ment banks and consultancies, they haveto be obsessive about talent: what else arethey selling?

But now something new is in the air.Thanks to a hyper-competitive labourmarket, professional-service �rms havebecome more preoccupied with talentthan ever; and even companies in moremundane businesses have begun to thinkthat they cannot manage without it.

The 1990s were a time of gallopinggrowth for professional-service �rms. JayLorsch, of Harvard Business School, andThomas Tierney, head of the BridgespanGroup, have produced some striking �g-ures, showing that global revenue acrossthe industry leapt from $390 billion in1990 to $911 billion in 2000. Companiesbecame both much bigger and much moreglobal: by 2000 PricewaterhouseCoopershad over 9,000 partners, and McKinseyhad 81 o�ces worldwide. There was afrenzy of mergers and acquisitions: Amer-

ica alone saw 7,638 of them in 1995-2000,worth a total of $471 billion. And lots ofnewcomers entered the market in the1990s�2,300 advertising �rms, 2,600 ac-counting �rms and nearly 50,000 free-lance consultants. This rapid growth fal-tered a bit when the dotcom bubble burst,but is now resuming.

Headlong expansion has created seri-ous problems for professional-service�rms. They have to work harder to woopotential recruits, particularly potentialstars, not just from each other but alsofrom high-tech companies. And they haveto turn their recruits into company men indouble-quick time. This has led them topay even more attention to talent.

Goldman Sachs, for example, under-went a wide-ranging internal review in1999, complete with benchmarkingagainst industry leaders. It increased itsemphasis on formal training, setting up aGoldman Sachs University, and encour-aged senior partners to put more e�ort intodeveloping talent. McKinsey’s PeopleCommittee has spent the past two years�ne-tuning its talent machine. It hasboosted its training budget to $100m,diversi�ed its sources of recruitment andrejigged its internal organisation to appealto well-quali�ed young people.

The triumph of the HR departmentManaging talent has become more impor-tant to a much wider range of companiesthan it used to be. One result has been thathuman-resources departments, whichused to be quiet backwaters, have gainedin status. A survey by Aon, a consultancy,identi�ed 172 HR executives who wereamong the �ve best-paid managers in their

companies. That would have been un-heard of a few years ago. The biggest earn-ers among them worked for some surpris-ing companies, such as Black & Decker,Home Depot, Pulte Homes, Viacom andTimberland. Companies are also trying togive their people-managers better tools.The Yankee Group estimates that last yearover 2,300 companies worldwide adoptedsome form of talent-management technol-ogy and predicts that the market for such

Everybody’s doing it

Companies of all stripes have become aware of the need to gather talent

1


2 or the ejection of Lawrence Summers aspresident of Harvard University becausehe had speculated publicly about whythere are so few women in the upper ranksof science.

It would be wonderful if talent weredistributed equally across races, classesand genders. But what if a free marketshows it not to be, raising all sorts of politi-cal problems? And what happens to tal-ented Western workers when they have tocompete with millions of clever Indians

who are willing to do the job for a smallfraction of the price?

This survey will argue that the talentwar has to be taken seriously. It will try toavoid de�ning talent either too broadly ortoo narrowly but simply take it to meanbrainpower�the ability to solve complexproblems or invent new solutions. It willthus focus on what Peter Drucker, the lateand great management guru, called�knowledge workers�. But there is nopoint in being dogmatic. The nature of crit-

ical talent varies from company to com-pany: it may be the ability to crack a fewjokes while turning an aeroplane aroundin 25 minutes, as demonstrated by South-west Airlines. It is one of the marks of a so-phisticated society that it rewards a widevariety of di�erent talents.

The survey will conclude by looking atthe widening inequalities that will resultfrom the competition for talent, andweighing up the risks of a backlash againstthe talent elite. 7


2 technology will nearly double by 2009.Talent-intensive companies have pro-

vided both a model and a training schoolfor the corporate world. GE is America’sCEO factory: when Mr Welch chose Je�reyImmelt to succeed him in 2001, two of hisdisappointed rivals, Bob Nardelli and JimMcNerney, were immediately snapped upby Home Depot and 3M respectively. It isalso an inspiration: there are now 1,600corporate universities loosely modelledon Crotonville. Consultancies and invest-ment banks have become �nishingschools for future corporate leaders: LouGerstner at Ibm, Ken Chenault at Ameri-can Express, Meg Whitman at eBay andChuck Conaway at K-Mart all started out inconsultancies (as do 65% of the products oftop business schools).

Capital One, a credit-card company,shows what a di�erence the application oftalent can make to a sleepy market. Thecompany’s headquarters, in McLean, Vir-ginia, looks more like a consultancy than abank. The atmosphere is informal. Thesta� is young and �data-centric�. The for-mula seems to work: founded in 1995, Cap-ital One is now number four in the Ameri-can credit-card market. Last year it doubledits number of employees to 20,000.

The company’s success is due to the de-ployment of lots of brainpower in a busi-ness generally seen as unexciting. Thefounders, Rich Fairbank and Nigel Morris,were both products of MBA programmesand consultancies. They decided that theycould use mass customisation to competewith �nancial giants such as American Ex-press, recruited a high-powered team offormer consultants and used sophisticatedstatistical techniques to slice the credit-card market into tiny segments.

To-do listCompanies are now beginning to gain in-sights into managing talent that should al-low them to tackle the problem in a moreorganised way. The �rst rule is to thinkmore carefully about their critical talent.Deloitte, a consultancy, o�ers a useful ex-ample of how UPS reduced the turnoverrate among the people who drive its trucksand deliver its packages. Big Brown hadfound that even though it selected its driv-ers with great care, turnover was uncom-fortably high, mainly because drivershated the back-breaking work of loadingthe trucks in the morning. So the companycontracted out this job to part-timers whoare much easier to �nd than drivers.

Second, it is essential to plan ahead.EDS, a giant technology company, has

built a global skills inventory of its100,000-strong workforce. The companycompared the workforce’s current skillswith its future needs and set about �llingthe gaps by encouraging workers to ac-quire the relevant skills. Schlumberger, aFranco-American oil-services group, is pre-paring for an expected skills shortage inthe next few years by asking its managersto cultivate successors, and holding rigor-ous inquests when a high-�yer jumps ship.

Third, companies need to be moreimaginative about recruiting and retainingtalent. That includes paying more atten-tion to �passive candidates��those whoare not actively looking for a job but mightbe open to seduction (see chart 2). Populartechniques include going through lists ofpeople attending conferences in order tobuttonhole stars, buying informationabout competing �rms (including namesof key workers) and searching the web forpeople who have created new patents.

High attrition rates in the �rst fewmonths have also persuaded companiesto pay more attention to keeping new re-cruits on board. In the late 1990s AmericanExpress found that far too many of its newmanagers were leaving within the �rst twoyears. It now gives them a chance to workon projects that are overseen by the CEO,as well as providing them with �assimila-tion coaches�. Companies are also cul-tivating relations with former alumni.Ernst & Young, a consultancy, �lls about aquarter of its vacancies from this source.

The fourth rule is to create internal mar-kets for talent. Many HR departments in-stinctively look outside. Deloitte calcu-lates that the typical American companyspends nearly 50 times more to recruit aprofessional on $100,000 than it spendson his or her further training every year.Moreover, new recruits can take more thana year to learn a job. One solution is to es-tablish an internal market, encouraging

workers to apply for jobs across the com-pany. Schlumberger encourages its em-ployees to post detailed CVs on the com-pany intranet; McKinsey allows consult-ants from all over the world to apply forany project within the company.

One di�culty with implementingthese ideas is that there is no consensusabout who is responsible for managing tal-ent. If the CEO is in charge, he may well bedistracted by too many other responsibil-ities; if it is the head of HR, he may lack theinstitutional heft to get much done.

Herding catsNor, indeed, is there a consensus on thebest way to manage talent. Part of the pro-blem is that HR as a discipline has notachieved anything like the level of sophis-tication of, say, �nance. But more impor-tantly, the more valuable the talent, themore di�cult it is to manage. In business,as everywhere else, world-class talentsometimes comes in unexpected guises.Ray Kroc sold milkshake machines to res-taurants before starting to build McDon-ald’s at the age of 52. David Ogilvy was achef, a farmer and a spy before becomingan advertising genius.

And solutions that have proved suc-cessful in one place do not necessarilywork in another. On arriving at Home De-pot in 2000, Mr Nardelli was determinedto apply the lessons he had learned at GE

to reinvigorate the DIY giant. He appointeda colleague from GE, Dennis Donovan, torun the HR side, and boosted his creden-tials by paying him the second-highest sal-ary in the company. He replaced the com-pany’s ad hoc talent-management systemwith a much more formal one, creating aleadership development institute, em-ploying more human-resource managersand imposing an elaborate system of per-formance measurement. But the resultshave been mixed. Home Depot’s shareprice is now somewhat lower than it waswhen Mr Nardelli took over. Wal-Mart andLowe’s are providing sti� competition.And there is widespread disgruntlementabout Mr Nardelli’s giant pay package. De-moralised employees have taken to callingthe company �Home Despot�.

Still, Mr Nardelli’s record is unlikely todiscourage other companies from trying to�nd ways to get on top of the problem.They are motivated by a powerful com-bination of fear and hope: fear of talentshortages and hope that they can beturned into a source of competitive advan-tage. Those hopes often involve shoppingfor talent in the developing world. 7

2A world of poachers

Source: Corporate Executive Board, Recruiting Roundtable, 2006

Employees contacted by another organisation, %

0 10 20 30 40 50 60

India

China

Australia

Canada

United States

Britain

Indian graduates also workmore: an average of 2,350hours a year compared with1,900 hours in America and1,700 in Germany. The bot-tom line is that you canbuy almost ten Indianbrains for the price of oneAmerican one.

The outsourcing boomshows no sign of slowing.Gartner, a research �rm,estimates that globalspending on IT outsourcingwill rise from $193 billion in2004 to $260 billion in 2009.But there are caveats. The mostimportant is that Indian-basedcompanies themselves are encounteringsevere skills shortages. Wage in�ation inIndia’s IT sector is about 16% a year, andturnover is 40%. NASSCOM predicts thatIndia’s IT sector will face a shortfall of500,000 professionals by 2010. GE Capitalhas posted signs in its Indian o�ces saying�Trespassers will be recruited�.

Skills shortages are at their most acuteamong managers. Several Indian compa-nies have had to bring in Western CEOs:the Tata Group, for example, has put Ray-mond Bickson, a Hawaiian, in charge of itshotel business. Good middle managers arerare: annual wage increases for projectmanagers in IT have averaged 23% a yearover the past four years.

Aspiring to world classHow can a country with a billion peoplesu�er from talent shortages? Some reasonsare familiar. The number of people withrelevant skills is tiny: only 11% of the rele-vant age group go on to higher education,and older people have had their manage-ment skills blunted by the old licence raj.Moreover, growth is so fast that it wouldstrain any educational system, let aloneone as ramshackle as India’s. For example,in the four years to March 2006 Infosys in-creased its payroll from about 10,700 toover 58,000�a compound annual growthrate of 53%.

The second caveat is that Indian-basedcompanies are determined to move up-market. They have mastered the basics: al-

most 400 of the companies ranked highestby the Software Engineering Institute atCarnegie Mellon University are in India.Now they want to become world-class.This means pushing into more sophisti-cated areas such as �integrated solutions�and consulting. It also means adopting thelatest productivity-boosting techniques,such as applying lean-manufacturing tech-niques to software development, a favour-ite strategy at Wipro. At the same timeWestern multinationals are exportingmore and more complicated tasks.

The looming skills shortage and thedrive upmarket have made companies ob-sessive about �nding and holding on tothe right people. They are investingheavily in education and training, partly toattract the best talent and partly to keeptheir existing workers up to speed. �We’reinvesting in training like the Dickens,� saysNandan Nilekani, Infosys’s CEO. The com-pany has increased its training budgetfrom $100m to $125m. It has also movedone of its board members, T.V. MohandasPai, from chief �nancial o�cer to directorof human resources to show that it meansbusiness. In the year to March 2006 Info-sys screened 1.4m applications, tested164,000 applicants and interviewed48,700 to make 21,000 appointments.

Companies are also getting much moreimaginative about identifying newsources of talent. Wipro has di�erent train-ing programmes for di�erent talent pools,

THE Infosys campus on the outskirts ofBangalore looks like a chunk of the rich

world that has been reassembled amidstthe dust and debris of India. The echoes ofSilicon Valley are everywhere. The jour-ney there involves a wild ride along dirtroads, but the 22-hectare (54-acre) campusitself is all cut grass and neatly planted�owers. It has every possible amenity,from gyms to yoga studios, from banks tobowling alleys. The restaurants serve 14di�erent cuisines. Many of the buildingsare in the low-slung Californian style, butsome of the largest are modelled on West-ern icons, such as the Sydney OperaHouse, the Louvre pyramid or Rome’s Ba-silica of St Peter.

Infosys Technologies was started in1981 by seven Indian entrepreneurs with10,000 rupees (about $1,000 at the time)between them. The software giant nowhas annual revenues of $2.2 billion and58,000 employees. But it is just one of ahundred companies in Bangalore’s Elec-tronics City. Bangalore is India’s softwarecapital, with 140,000 software engineers(more than in Silicon Valley, the localsboast), and Electronics City is a custom-built high-tech haven. The signs are a list ofthe world’s biggest IT companies, frommultinationals such as Hewlett-Packardand Motorola to home-grown giants suchas Infosys and Wipro.

Electronics City is the meeting point ofthe West’s demand for high-tech servicesand India’s supply of brain power. Thedramatic fall in the cost of communica-tions made it possible for Western compa-nies to outsource services, and a newly lib-eralised India could o�er a huge supply ofcheap brain workers. Every year India pro-duces around 2.5m university graduates,including 400,000 engineers and 200,000IT professionals. India’s National Associa-tion of Software and Service Companies(NASSCOM) calculates that the country-has 28% of the world’s IT o�shore talent.

Indians point to the advantages thatthey bring to the market. They work whilethe West sleeps; they speak (splendid) Eng-lish; they can throw huge numbers of peo-ple at a job. But at the heart of the boom is asimple sum. The cost of an Indian graduateis roughly 12% of that of an American one.

The world is our oyster

The talent war has gone global�and so have talent shortages

1


1


2 including one to help people get a univer-sity degree while working for the com-pany. Mr Pai describes Infosys as a �hu-man-capital supply-chain company�. Butto keep the supply chain going, India mustimprove its universities.

Versions of Bangalore’s Electronics Cityare in evidence in a number of developingcountries, and so are skills shortages.China is seeing double-digit wage in�ationand labour turnover in its IT sector. Seniormanagers are particularly scarce: two inthree companies report di�culties in �ll-ing senior positions. Shanghai Automo-tive, China’s biggest carmaker, and Le-novo, its biggest computer-maker, haverecently hired American bosses. But otherskills are also in short supply: Chinese air-lines, for instance, are importing pilots.

If Western companies were initially at-

tracted to the developing world by the lowprice of talent, they have now moved on toother considerations. Srini Koppolu, thehead of Microsoft’s India DevelopmentCentre (MSIDC), explains that one reasonwhy Microsoft established a developmentcentre in Hyderabad was to gain an edge inthe talent war. Being in India gives you ac-cess to �rst-rate techies who do not want tomove abroad. MSIDC has grown from 20employees in 1998 to over 900 today.

The other advantage is local know-ledge. Vijay Mahajan, a former dean of theIndian School of Business, which sits nextto Microsoft’s campus, points out that thedeveloping world is a booming market aswell as a huge labour pool. GE calculatesthat 60% of its growth over the coming de-cade will come from the developingworld, compared with 20% over the pastdecade. And the only way to understandthe new market is to be immersed in it.

Many Western companies thought thattheir goods would almost sell themselvesin the developing world. They reckonedwithout complicated distribution systems,feisty local competitors and idiosyncraticlocal habits. Packaged-goods companiesfound that customers did not want theirjumbo packets, for example, because theyhad little money and little storage space.Local people could have told them that.

Hewlett-Packard has set up research fa-cilities in India in the hope of building astripped-down 5,000-rupee ($109) com-puter. Electrolux Kelvinator has de-veloped a refrigerator that will stay coldeven after a six-hour power failure. Nokiahas produced a mobile phone that in-cludes a built-in �ashlight and a dust-resis-tant keypad. In GE’s John F. Welch Technol-ogy Centre in Bangalore, 2,200 highly

quali�ed engineers work as part of digi-tally connected global teams on productsas diverse as aircraft engines, power andtransport systems and plastics. Cisco’s andMotorola’s Indian research centres aretheir largest outside America.

Most of these companies have researcharms in China as well. Microsoft’s de-velopment centre in Beijing is a worldleader in graphics, handwriting recogni-tion and voice-synthesisation. Motorolahas 16 R&D centres in China. Samsung hasset up a handset laboratory with a sta� of300 in Beijing, and Siemens has moved achunk of its mobile R&D to China.

Think globalThis R&D boom in the developing world ispart of a bigger trend: the globalisation ofR&D. This allows companies to plug intonational clusters of excellence (South Ko-rea has been a trailblazer in digital dis-plays, for example, and Israel has an edgein wireless telecoms). It gives multination-als access to once secretive university labsin Shanghai and Moscow. And it speedsup innovation, because global teams canwork around the clock.

Still, it is one thing to send humdrumwork to Electronics City and supervisehigh-tech drudges, quite another to out-source bits of your core business and man-age world-class skills. That involves muchmore than co-ordinating activities acrossgeographical boundaries. For example,how do you disperse innovation aroundthe world without weakening your cor-porate culture? How do you motivate high-�yers from di�erent cultures? And how doyou manage prima donnas across bor-ders? You need world-class managementtalent, and that, too, is extremely scarce. 7

3Going upmarket

Source: BCG 2005 Senior Executive Innovation Survey

Foreign companies planning to increasethe amount of R&D they conduct in...% of respondents

0 20 40 60 80 100

Automotive

Consumerproducts/retail

Technology/IT

Media/entertainment

Industrial goods

Telecommunications

Financial services

China India

IMMIGRANTS tend to get a bad press. Inreality, though, many economies would

be lost without them, and many govern-ments are desperate to attract them. Themost mobile people are not the poor butthe educated, and they are sought after asnever before.

Most governments are easing restric-tions on the entry of skilled workers. Someare going further and o�ering incentives.Germany has made it easier for skilled

workers to get visas. Britain has o�eredmore work permits for skilled migrants.France has introduced a �scientist visa�.Many countries are making it easier for for-eign students to stay on after graduating.Canada and Australia have not only tiltedtheir long-established points systems fur-ther towards the skilled, they have also in-troduced more incentives. Canada experi-mented with a tax holiday for citizensreturning from the United States before re-

alising that this encouraged temporaryemigration. Ireland’s government workshard to recruit overseas talent.

The most ambitious programme fordrawing in brains from abroad is�whereelse?�in Singapore. Lee Kuan Yew, thecity-state’s elder statesman, has long ar-gued that �trained talent is the yeast thattransforms a society and makes it rise.� At�rst Singapore focused on wooing its émi-grés. Now it is going out of its way to im-

Opening the doors

Governments are joining in the hunt for talent

1


2 port foreign talent. Only 3% of companiesexperienced problems with the immigra-tion authorities, compared with 24% inChina and 46% in the United States. Singa-pore is particularly keen to attract scienti�ctalent, mainly in biotechnology. Of the 170sta� working in the country’s Genome In-stitute, about 120 are foreigners. Alan Col-man, a member of the Scottish team thatcloned Dolly the sheep, is also based inSingapore now.

Enrol hereMany countries regard universities as idealtalent-catching machines, not only be-cause they select students on the basis ofability but also because those studentsbring all sorts of other bene�ts, fromspending money to providing cheap re-search labour. France is aiming to push upits proportion of foreign students fromabout 7% now to 20% over time. Germanyis trying to create a Teutonic Ivy Leagueand wants to �internationalise studies inGermany�. Both countries are o�ering lotsof courses in English. In Singapore a �fth ofthe students at public universities are for-eign, thanks in part to heavy subsidies.Australia and New Zealand have created aladder leading from universities to theworkforce and then to permanent resi-dence. China, which temporarily dis-pensed with entrance examinations dur-ing the Cultural Revolution, is focusingresources on its elite universities.

But government schemes can makemuch of a di�erence only if they arebacked up by a vibrant economy, and onlyif cultural resistance can be overcome. Nomatter how much Japan speeds up the pro-cessing of scienti�c visas, it will not attractmore foreigners unless Japanese �rms areprepared to give them senior jobs.

Still, a combination of sensible govern-ment policies and economic liberalisationcan work wonders, as Ireland has demon-strated. A country that has exported peo-ple for centuries is now a net importer. Brit-ain has also seen a surge in the number ofskilled people arriving from both the richand the developing world, thanks to theLabour government’s more immigrant-friendly policies since taking o�ce in 1997.The share of skilled people in total immi-grant arrivals increased from 7% in 1991 to32% in 2001.

Some of the best prospects in the com-petition for talent are émigrés�peoplewho have gone abroad to make their for-tune but still feel the tug of their homecountry. Both China and India are nowtrying to emulate Ireland’s success in woo-

ing back the diaspora, but China is tryingharder. In 1987 the Communist Party’s gen-eral secretary, Zhao Ziyang, describedChina’s brain drain as �storing brainpower overseas�. O�cials from everylevel of government have been raiding thestore since, as part of a policy of �strength-ening the country through human talent�.

They have introduced a mind-bogglingrange of enticements, from bigger apart-ments to access to the best schools, fromchau�eur-driven cars to fancy titles. TheChinese Academy of Sciences has estab-lished a programme of generous fellow-ships for expats�the �hundred talents pro-gramme�. Beijing has an o�ce in SiliconValley, and Shanghai has established a�human talent market�. China is litteredwith shiny new edi�ces labelled �return-ing-student entrepreneurial building�.

All this coincides with a change in the�ow of people. For decades returneeswere rare. The numbers began to shoot upin 2000, when the bursting of the SiliconValley bubble coincided with rapidgrowth in China. Despite doubts about thequality of some of these people, there isgrowing evidence that China is going inthe same direction as South Korea and Tai-wan��rst tempting back the diaspora (seechart 4) and then beginning to compete forglobal talent.

India has taken a di�erent approach.The government has relied as much on thegoodwill of prominent businesspeople asit has on the wisdom of bureaucrats; it hasalso cast its net wider, focusing not just onluring back expats but also on putting thewealth and wisdom of the diaspora towork on behalf of the mother country.There are an estimated 20m Indians living

abroad, generating an annual incomeequal to 35% of India’s gross domestic pro-duct. The Indian government is doingwhat it can, in its haphazard way, to letthem participate in the Indian boom, mak-ing it easier for them to invest back homeand streamlining visa procedures. There isa special visa for �people of Indian origin�.

Come back, all is forgivenAgain, government policy has coincidedwith a change in the �ow of people. NASS-

COM estimates that in 2001-04 some25,000 Indian techies returned home, andthe number is rising rapidly. A survey ofIndian executives living in America foundthat 68% were actively looking for oppor-tunities to return home, and 12% had al-ready decided to do so; and a survey ofgraduates of the elite All India Institute ofMedical Sciences who were living abroadfound that 40% were ready to go home.

For years, discussion of the cross-bor-der �ow of talent has sounded a sombre

4Your country needs you

Source: China Statistical Yearbook

Number of students returning to China, ’000

1978 85 90 95 2000 040

5

10

15

20

25

1


2

INDIA’S high-tech enclaves exude eupho-ria. Proud techies take their parents on

tours of company campuses. Proud par-ents boast that their children earn morethan the rest of the family combined. MrNilekani of Infosys says that his com-pany’s greatest achievement is not its $2billion turnover but the fact that it hastaught Indians to rede�ne the possible.

The mood in America, the country thatis driving the outsourcing boom, couldhardly be more di�erent. People view theglobal war for talent with foreboding.Their fears take two forms. The �rst is thatwell-paying jobs in services will followmanufacturing jobs to the developingworld. Norman Augustine, a former bossof Lockheed Martin, says that �virtually noone’s job seems safe.� Craig Barrett, thechairman of Intel, admits that �I worry formy grandchildren.�

The second fear is that America may nolonger be able to attract more than its fairshare of the world’s brains. Half the Amer-icans who won Nobel prizes in physics inthe past seven years were born abroad.More than half the people with PhDsworking in America are immigrants. Aquarter of Silicon Valley companies werestarted by Indians and Chinese. Intel, Sun

Microsystems and Google were allfounded or co-founded by immigrants. Butnow India and China are sucking backtheir expats, and America’s Europeancompetitors have woken up to the impor-tance of retaining their talent. To cap it all,the immigration authorities are makinglife harder for foreigners.

Are Americans right to worry? Onemisconception is that the number of jobsis �xed, so if some of them go abroad theremust be fewer left at home. If a farmer inPalo Alto in 1900 had been told that in ahundred years’ time agricultural workerswould account for only 2% of the Ameri-can workforce, he would have expectedthe Valley to become a desert rather than aglobal technological hub. But even if thenumber of good jobs were �xed, the fearsof a great job migration are exaggerated.

The McKinsey Global Institute has con-ducted a large-scale study of the o�shoringmarket and concluded that constraints onboth the demand and the supply side willkeep the number of service jobs movingo�shore much lower than is widely be-lieved. It will probably rise from 1.5m in2003 to 4.1m in 2008, or 1.2% of the de-mand for labour in the developed world.That �gure is dwarfed by the normal job

churn in America, where 4.6m Americansstart with a new employer every month.

There is clearly plenty of eager talent inthe developing world. But McKinsey ar-gues that only about 13% of that talent iscapable of working for a Western multi-national in a high-grade job at the moment(although the stock of suitable profes-sionals is expanding a lot faster in develop-ing than in rich countries). There are pro-blems with cultural and language skills,particularly in China. The quality of edu-cation is often inadequate. China mayhave twice as many engineering graduatesas America, but only 10% of them areequipped to work for a Western multinat-ional. Geography also imposes limits. Inlarge countries such as India and Chinamany graduates live far away from inter-national airports. In China only about halfthe talent pool is accessible to multination-als, according to McKinsey.

There are other worries too. In his re-cent book, �Three Billion New Capitalists:The Great Shift of Wealth and Power to theEast�, Clyde Prestowitz quotes a Chinesefriend: �We’ve had a couple of hundredbad years, but now we’re back.� Yet shrug-ging o� the burden of history is not soeasy, particularly when, as recently as

Nightmare scenarios

Western worries about losing jobs and talent are only partly justi�ed

note. For some critics it is nothing less thana new form of colonialism. The rich world,they say, is not only appropriating the de-veloping world’s best brains but gettingthem on the cheap, with their educationpaid for by someone else. One study of 55developing countries found that a third ofthem lost more than 15% of their graduatesto migration. Turkey and Morocco lose 40%and the Caribbean countries 50%. But inrecent years some of the gloom has lifted.

In fact, it was always overdone. Mi-grants sent huge amounts of money homein remittances: $126 billion in 2004, ac-cording to the International MonetaryFund. They also transferred knowledgeand connections. The current Indianboom owes much to successful Indianswho emigrated in the 1960s and 1970s andwho are now determined to modernisetheir home country. They have formedsupport groups such as Indus Entrepre-neurs, steered multinational contracts to

India, established venture-capital fundsand helped found business schools.

But what has recently helped to changethe mood is that the �ow is no longer oneway. The brain drain is giving way to braincirculation, and returning émigrés areturning into economic dynamos. One ex-ample is Dr Prathap Reddy, a returneefrom America, who established the ApolloHospitals Group, one of Asia’s largest andthe �rst to attract foreign investment.

Refreshing e�ectReturnees seem to have a spring in theirstep. In Ireland they enjoy a 10% wage pre-mium over their stay-at-home compatri-ots. In China they receive more grants andfellowships than their domestic competi-tors. A third of Taiwan’s companies werefounded by returnees from America.

What the talent elite everywhere has incommon is that it is more mobile than therest. Two economists, Frédéric Docquier

and Hillel Rapoport, estimate that averageemigration rates worldwide are 0.9% forthe low-skilled, 1.6% for the medium-skilled and 5.5% for the high-skilled. Theserates have been accelerating far faster forthe high-skilled group than for the rest.Skilled immigrants accounted for morethan half of all admissions in Australia,Canada and New Zealand in 2001.

The global war for talent is likely to in-tensify. Most developed countries are al-ready struggling to �nd enough doctorsand teachers, and are wondering howthey will manage when the baby-boomergeneration retires. Developing countries,for their part, realise that they will not beable to plug into the global knowledgeeconomy unless they give their people thefreedom to move around. A powerful ar-ray of interests, from multinationals to citypoliticians, supports the idea of a globalmarket for the best people. Countries cutthemselves o� from it at their peril. 7


2 1966-76, the brightest and sparkiest peoplewere dumped in labour camps. The Chi-nese have been able to turn their countryinto a manufacturing giant because oftheir willingness to work harder and lon-ger; but turning it into a service giant, letalone an innovation hub, will require dif-ferent qualities.

China’s biggest problem is a culture ofdeference�a culture that was re�ned bythe mandarin tradition and then rein-forced by the Communist Party. For manyChinese it is bad form to question supe-riors. So far, China has been much moreadept at borrowing other people’s ideasthan producing its own, particularly whenit comes to high-level innovation. But thereare plenty of other problems, ranging frompoor English-language skills to weak intel-lectual-property rights. Many Westerncompanies are rightly nervous about de-veloping new products in a country whereideas are routinely stolen.

India’s di�culties have more to do withanother intractable problem: poor govern-ment. The country’s infrastructure is crum-bling and the education system is hugelyuneven. The Indian Institutes of Technol-ogy are very good at producing a highlyeducated elite, but run-of-the-mill collegesare often of poor quality. The result is grad-uate unemployment of 17% at a time whenthe high-tech economy is booming.

Don’t overdo the gloomAmericans are right to worry about losingout in the international competition for tal-ented people, particularly as highly quali-�ed Indians and Chinese based in Amer-ica go home. America’s immigrationsystem is hopelessly antiquated, gearedmore towards reuniting families than at-tracting high-quality workers. The 2005

allocation for H1B visas for skilled workersran out on the �rst day of the �scal year.The terrorist attacks of September 11th2001 have made things worse. Studentscomplain that they have to wait monthsfor a visa, and some decide to accept o�erselsewhere. One-third of American compa-nies report serious delays in bringingskilled employees into the country.

But again these worries are exagger-ated. America remains the world’s num-ber one destination for foreign students,soaking up almost 30% of the global sup-ply. There is every reason to think that theabsolute number of people from India andChina who want to study in America willrise as those countries get richer. It is truethat some foreigners who might havestayed in America a few years ago are go-ing home. But David Zweig, of the HongKong University of Science and Technol-ogy, argues that the best Chinese studentsremain abroad. The pattern of geographi-cal mobility is likely to get more compli-cated in the future as people divide theircareers between the developed and the de-veloping world, but America is unlikely tobe denuded of talent.

Another concern is that America is suf-fering from a brain drain from science andengineering, starting in high schools,where there are too few teachers quali�edto teach di�cult subjects and too few pu-pils willing to grapple with them. TheHigher Education Research Institute at theUniversity of California at Los Angelesfound that the proportion of incoming un-dergraduates planning to major in com-puter science is now 70% below its peak inthe early 1980s. But here, too, things are notas bad as they seem. Many of the �guresthat have set alarm bells ringing�thosemillions of Chinese engineers, for exam-ple�are misleading because they fail totake quality into account. McKinsey calcu-lates that, in 2003, America had far more

young engineers who were capable ofworking for multinational companiesthan China�540,000 against 160,000.

Besides, the argument is based on amisunderstanding of how science pro-gresses. America does not become lesscompetitive because China invests morein science; indeed, outside highly propri-etary areas, Chinese investment in sciencewill help to advance scienti�c knowledgein general.

America still has overwhelming advan-tages in the war for talent. One is the qual-ity of its universities, which regularly dom-inate global league tables. The second isthe quality of its business environment�from the availability of venture capital tothe quality of its management cadre to itswillingness to pay for the best people. Thestate of California alone has more venturecapital than any country outside the Un-ited States. Robert Huggins Associates, aBritish-based economics consultancy,found that the world’s top seven regional�knowledge economies�, measured bythings such as patent registrations, invest-ment in R&D and the proportion of knowl-edge workers, were all in the United States.

Europe has less reason to be cheerfulthan America. Business is burdened by ri-gidities and regulations. The universitiesare not what they were. The EU invests30% less in R&D than America does, andmost of its 400,000 researchers workingon the other side of the pond have no in-tention of returning. Yet Europe, too, stillhas huge strengths in the �tacit� skills thatare at such a premium in a knowledgeeconomy. Germany has deep expertise inengineering, Italy in design and Finland inwireless technology. Europe is also doingmore than America to reform its immigra-tion system in hopes of attracting talent.All the same, Europe needs to get seriousabout freeing its economy and its universi-ties from intrusive controls. 7

5Follow the money

Source: OECD

Spending per student, ’000, $PPP

0 5 10 15 20

UnitedStates

Japan

EuropeanUnion

Pre-primaryPrimaryLower secondary

Upper secondaryTertiary

1


Masters of the universe

The war for talent is shifting the balance of power from companies to workers

THE world headquarters of what its pro-prietor jokingly calls �Pink Inc� is in the

attic of a redbrick house in north-westWashington, DC. Children’s pictures deco-rate the walls; highbrow novels are jum-bled up with business books. Daniel Pinkspent much of the 1990s working for theClinton administration, ending up as chiefspeechwriter for Al Gore. But in the late1990s he decided to branch out on hisown. He now makes his living as what hecalls a �free agent��doing a bit of consult-ing, giving speeches, writing articles (he isa contributing editor to �Wired�) andbooks, including, in 2001, a book aboutpeople like himself, �Free Agent Nation:How America’s New Independent Work-ers are Transforming the Way We Live�. MrPink has no doubts about the changingbalance of power in the corporate world:�Talented people need organisations lessthan organisations need talented people.�

Part of the reason is technology. MrPink calls it �Karl Marx’s revenge�: themeans of production, in the form of com-puters, are now in the hands of the work-ers, often literally, �cheap enough to buy,small enough to house and easy to oper-ate�. The most dramatic example of thepower of ordinary people is the so-calledpyjama revolution. Bloggers have repeat-edly out�anked the mainstream media ondomestic political news. Glenn Reynolds,a law professor at the University of Ten-nessee, with no background in the media,gets half up to half a million page views aday for his blog, instapundit.com.

At the same time organisations are los-ing many of their bargaining chips, such asbeing able to o�er job stability and secu-rity. Starting in the 1980s, many corpora-tions tore up the old corporate contract�apermanent job in return for the em-ployee’s loyalty��rst in America and thenin much of the rest of the world. Even com-panies that wanted to provide such jobshad a hard time delivering them. Of Amer-ica’s 100 biggest industrial �rms in 1974,half had disappeared by 2000. Mr Pink ar-gues that free agents may actually enjoybetter security than people with regularjobs: they diversify their risks rather thanrelying on the wisdom of their bosses.

The upshot is a steady decline in the

number of people willing to wear the com-pany collar. The number of one-man busi-nesses in the United States is growing by4-5% a year. At the same time, the averagelength of job tenure for American workershas shrunk: the median period for whichmen aged 55-64 had been with their cur-rent employers declined from 15.3 years in1983 to 10.2 years in 2000. Some of thismovement is no doubt involuntary, butsome of it re�ects a disenchantment withtheir current employers. A survey by He-witt Associates, a consultancy, found that40% of employees expressed an interest inworking somewhere new. The ConferenceBoard discovered that 40% of mid-levelmanagers maintained relationships withprofessional recruiters.

The shift in the balance of power be-tween workers and organisations is par-ticularly noticeable among top talent andamong young workers. Being a free agentis fashionable among sports stars and Hol-lywood celebrities. Technology stars rou-

tinely hop from job to job. A growing num-ber of high-�ying managers changeorganisations on the way to the top. Com-panies that have recruited CEOs from out-side in the past few years include Hewlett-Packard, 3M, Boeing, Merck, Kodak, Moto-rola, Honeywell and Home Depot.

Young high-�iers are also �nicky aboutjobs. They have a strong sense of their mar-ket value: unemployment among Ameri-can graduates is currently around 2%, andthat is before the baby-boomers havestarted to retire in earnest. They also haveaccess to inside information, from web-sites such as vault.com, where they can�nd uno�cial accounts of what it is like towork for a particular organisation, and sal-ary.com, which gives them a good idea ofwhat they can expect to earn.

The discreet charm of the water coolerBut organisations still have a few things go-ing for them. First, many people actuallyenjoy the sense of belonging and the ritu-als of o�ce life. Second, the best compa-nies are repositories of skills that are hardto replicate. Talent may reside in the brainsof individuals, but it is also nurtured byorganisations.

This was underlined by a study of starsecurity analysts in American investmentbanks in 1988-96, conducted by BorisGroysberg of Harvard Business School andAshish Nanda of Harvard Law School.These analysts might look like the perfectfree agents. Their skills are highly portable,and if they want to change jobs all theyhave to do is walk across the street. In fact,the research showed an immediate de-cline in their performance if they switchedemployers. This was most marked forthose who moved to lower-rated �rms anddid not take other members of their team

with them, but was noticeableeven for those who moved be-tween similar �rms. Talentedpeople may think that theirbrainpower allows them to

walk upon water, but in reality many arewalking on the stones that their employershave conveniently placed beneath them.

What should companies do to con-vince brainy people to work for them? TheCorporate Executive Board argues that

1


2 they need to focus on their �employmentvalue proposition�. The EVP is what em-ployees gets out of working for a particularorganisation. Obviously pay and bene�tsare a big part of that. But there is muchmore�from a congenial culture to thechances to develop their skills.

On the basis of a detailed study ofabout 90 companies, the Corporate Execu-tive Board argues that the rewards for man-aging an EVP e�ectively are huge, increas-ing a company’s pool of potential workersby 20% and the commitment of its employ-ees fourfold. It can even reduce the payroll:companies with well-managed EVPs getaway with paying 10% less than those withbadly managed EVPs. But most companiesare falling down on this job. Three-quar-ters of new recruits feel that their employ-ers are failing to deliver on their promises,making the recruits feel less committed totheir work.

Companies need to put more e�ort intode�ning their EVP, says the CEB. Most hu-man-resources departments put the em-phasis on the company’s ethos, but poten-tial employees are more concerned aboutrewards and opportunities. Companiesalso need to �ne-tune their EVPs for di�er-ent segments of the talent market, and par-

ticularly for di�erent geographies, whichaccount for most of the di�erences in whatemployees are looking for. Americans arekeenly interested in health and retirementbene�ts, whereas Indians emphasisegrowth rates and innovation.

Companies also need to devote muchmore e�ort to getting their message out.Most people are cynical about informa-tion in advertisements (except, oddly, inIndia). They put much more trust in whatcurrent and former employees say. Com-panies have to �nd ways to turn informalnetworks into recruiting tools. Mitre, anengineering company, operates in a tightmarket for talent, with low unemploy-ment for software engineers and big-namecompetitors such as Lockheed Martin. Thecompany improved its recruitment by en-couraging its existing employees to act as�champions�, telling them what sort ofpeople it was looking for and asking themto get involved.

Seat of learningThe most important thing that companiescan do to attract talented people is to boosttheir workers’ long-term employability.Employees no longer expect companies too�er job security (according to one survey,

94% of those questioned thought that itwas they, not their employers, who wereresponsible for that). But they do expecttheir employers to help them keep theirskills up to date.

This may not be as simple as it sounds.Most companies make much of their cor-porate universities and their online train-ing, but there is often less to these thanmeets the eye. The CEB found that com-pany investment in learning and develop-ment in America in 2004-06 barely kept upwith in�ation. The average companyspends only $800 per employee per year,about 1.25% of the annual payroll. The av-erage company provides training for onlytwo-thirds of its employees, and some domuch less.

Besides, most employees value infor-mal training more than formal teaching: ina survey by Deloitte, 67% of respondentssaid that they learn most when they areworking with a colleague, with only 22%saying that they do best when they areconducting their own research, and only2% happiest with a manual or a textbook.

Clearly the best way for companies towin the talent wars is to turn themselvesinto learning organisations. The trouble isthat few of them know how to do this. 7

FRANCIS GALTON, a cousin of CharlesDarwin, was a Victorian gentleman-

scholar of eccentric genius. He devoted hislife to measuring everything imaginable�from the frequency of �dgets in a bored au-dience to the size of the buttocks of a Hot-tentot woman (from a discreet distance,using a sextant). But what obsessed himabove all was mental distinction. Whywere some people cleverer than others?Why did intellectual distinction run insome families? And how were intellectualabilities distributed in the population?

Galton came to two conclusions. The�rst was that ability owed more to naturethan to nurture. The second was that therange of mental powers between thecleverest and the dumbest was enor-mous��reaching from one knows notwhat height, and descending to one canhardly say what depth�. He put these to-gether to produce a theory of human in-equality: the more open society becomes,

the more an aristocracy of talent will re-place an aristocracy of birth.

Galton’s argument contained a gooddeal of nonsense. He understated the im-portance of nurture, and he ignored classprivileges. But it did o�er an important in-sight: that a free market in talent could endup widening social inequalities.

The rich get richerAmerica, the country with the world’s fre-est market in talent, is seeing a dramatic in-crease in inequality. Emmanuel Saez ofthe University of California at Berkeleyand Thomas Piketty of the Ecole NormaleSupérieure in Paris have dissected tax re-cords to examine changes in income distri-bution, and found that the share of incomegoing to the highest-earning 1% of Ameri-cans doubled between 1980 and 2004, to16%. The share going to the top 0.1% morethan tripled over the same period, to 7%.

Part of the reason lies in social conven-

tion: Europeans have strong cultural objec-tions to paying their CEOs the sort of sala-ries that American bosses get. Part of it ispolitical: inequality has risen faster underthe Republicans than under the Demo-crats. The unions are weaker than theywere. But a bigger reason is rising returnsto talent and skill.

This is most obvious with sports starsand Hollywood celebrities. The picture is abit murkier when it comes to CEOs. Thereare well-publicised examples of companybosses who pack their board with croniesand rig their compensation so that theypro�t whether their company does well ornot. On the other hand, the best CEOs,such as Jorma Ollila of Nokia and A.G. La-�ey of Procter and Gamble, create hugevalue for their organisations. And most ofthem work in a highly competitive market.The average length of tenure of CEOs is go-ing down, and a growing number of themare recruited from outside. Relative to mar-

The revenge of the bell curve

As talent becomes more valuable, inequalities are widening

ket capitalisation, by some measures exec-utive pay is now falling.

Top performers are doing well in every�eld. Even universities, which were oncebastions of collegial equality, are willingto pay a premium for academic stars�notonly because their ideas are so valuablebut also because they will attract otherhigh-�yers. These huge rewards may of-fend egalitarians, but they make a lot ofeconomic sense. Stars have a dramatic im-pact on the fortunes of organisations. AlanEustace, a vice-president of Google, toldthe Wall Street Journal that in his view onetop-notch engineer is worth �300 times ormore than the average�. Bill Gates says that�if it weren’t for 20 key people, Microsoftwouldn’t be the company it is today.�

Success in climbing to the top of anorganisation requires many kinds of tal-ent. Most consultancies eventually shed80% of their recruits. Only one in ten lawstudents makes it to senior partner at a toplaw �rm. Managers su�er a huge attritionrate as they move up their organisations.

Trickle-downNow the tendency for the best to pull awayfrom the rest is spreading down the cor-porate hierarchy. Companies are deter-mined to keep their wage bill under tightcontrol because they face competitiveglobal markets. But they are also desperateto keep their best talent from falling intothe hands of rivals. So they have beenkeeping their overall wage bill more or lesssteady but giving a larger share of it to thetop performers.

A survey by the Society for Human-Re-source Management found that the shareof companies taking special measures to

keep their best workers rose from 35% in2004 to 49% last year. A survey by the Cor-porate Executive Board found that 88% oforganisations wanted to increase pay dif-ferentials. Those di�erentials could get alot wider in the future. The CEB says thatthe variance in performance increaseswith the complexity of the job. The bestcomputer programmers are at least 12times as productive as the average.

The link between talent and inequalityis being strengthened by two things. The�rst is the tendency of talented people tocluster together. You might have thoughtthat the advent of the internet would haveeroded the connection between place andtalent. In fact, the opposite is happening.Bright people gather in university citiessuch as Boston and San Francisco, or intechnology hubs such as Austin, Texas, orRedmond, Washington, or in rural idyllssuch as Camden, Maine, and Jackson Hole,Wyoming. They cluster together becausethey feed o� each other’s intellect. Christo-pher Berry, of the University of Chicago,and Edward Glaeser, of Harvard, havestudied the distribution of human capitalacross American cities. They found that in1970 about 11% of people over 25 had a col-lege degree, and they were fairly evenlydistributed throughout the country. Sincethen the proportion of Americans withcollege degrees has more than doubled,but the distribution has become muchmore uneven.

Increasing numbers of high-�yers aremoving from inland locations to thecoasts: once �ourishing cities such as StLouis, Missouri, are losing young talent toNew York and Los Angeles. And the placeswhere talent likes to cluster are becoming

increasingly unequal, with the tal-ent elite at the top, service workers

at the bottom and nothing much in-be-tween. The middle layer is being drivenout by sky-high house prices and low-quality public schools. Richard Florida, ofGeorge Mason University, points out thatthe three most unequal metropolises inthe country�Raleigh-Durham, San Fran-cisco and Washington-Baltimore�are alsohubs of what he calls �creative workers�.

The second factor that links talent andinequality is that members of the talentelite are good at hogging �human capital�.They marry people like themselves. In theheyday of �company man�, bankers mar-ried their secretaries; now they marryother bankers. They work in jobs that addto their intellectual capital. They live in�talent enclaves�, away from ordinarymiddle-class suburbs, let alone inner-cityghettos. Above all, they pass on their ad-vantages to their children. Students fromthe top income quartile increased theirshare of places in elite American universi-ties from 39% in 1976 to 50% in 1995.

None of this is peculiar to America orother rich countries; the same thing is hap-pening in the developing world in evenstarker form. Members of the talent elitethere live in gated communities, some ofthem with American names such as PalmSprings, Napa Valley or Park Avenue, thatboast international schools, world-classhospitals, luxury housing and splendidgyms. And they try hard to give their chil-dren every possible advantage. One recentbestseller in China, �Harvard Girl�, tellsthe story of two parents who trained theirdaughter for Harvard from birth, barragingher with verbal stimuli, subjecting her to astrenuous regime of home study and mak-ing her swim long distances. One of themost successful schools at getting studentsinto American Ivy League universities isRa�es Junior College in Singapore.

The talent war is producing a globalmeritocracy�a group of people nick-named �Davos men� or �cosmocrats� whoare reaping handsome rewards fromglobalisation. These people inhabit a so-cio-cultural bubble full of other super-achievers like themselves. They attendworld-class universities and businessschools, work for global organisations andspeak the global language of business.

Countries that still insist on clinging toegalitarianism are paying a heavy price.Sweden, for instance, �nds it hard to attractforeign talent. And across Europe, egalitar-ian universities are losing out to their moreelitist American rivals. 7


2

IN �THE RISE OF THE MERITOCRACY�,published in 1958, Michael Young, a Brit-

ish sociologist and Labour Party activist,conjured up an image of a society ob-sessed with talent. The date was 2034, andpsychologists had perfected the art of IQtesting. But far from promoting social har-mony, the preoccupation with talent hadproduced social breakdown. The losers inthe talent wars were doubly unhappy,conscious not only that they were failuresbut that they deserved to be failures. Even-tually they revolted against their masters.

The rise of the talent elite has bred resis-tance, which started on the right. T.S. Eliot,a 20th-century poet and critic, argued thatchoosing people on the basis of their tal-ents would �disorganise society and de-base education�. Edward Welbourne, aCambridge don, dismissed IQ tests as �de-vices invented by Jews for the advance-ment of Jews�. But after the second worldwar the resistance spread leftward. Leftistsargued that meritocracies were not onlyunpleasant but unjust. If �talent� owedmore to nature than nurture, as many so-cial scientists insisted, then rewarding peo-ple for talent was tantamount to rewardingthem for having privileged parents.

This resistance has occasionally boiledover into outright rebellion. Young’s bookwas an opening shot in a successful waragainst the 11-plus, a British school exami-nation that divided children between agifted elite destined for academicgrammar schools and those con-signed to run-of-the-mill sec-ondary modern schools. The

1960s saw widespread student revoltsagainst selection and elitism.

There are plenty of signs that anotherbacklash is on the way, from John Kerry’scomplaints about American companiesoutsourcing jobs to a rash of riots in China.Much of this resentment focuses on grow-ing inequalities. People complain thatthese are straining the bonds of society tobreaking point: a new aristocracy of talentis retreating into golden ghettos and run-ning the global economy in their own in-terests. �The talented retain many of thevices of aristocracy without its virtues,�said the late Christopher Lasch, an Ameri-can historian, in one of the best analysesof the trend. The logic of talent wars is mer-itocratic: the most talented get the most re-wards. But the reality of democracy isegalitarian: the people can use their politi-cal power to defeat the bell curve.

In some ways things are worse thanthey were when Young wrote his book. In-equalities are much wider�in both Amer-ica and China they are returning to early20th-century levels�and the talent elitehas gone global. Young’s rebels can nowadd patriotism (or bigotry) to egalitarian-ism. Manuel Castells, a sociologist, com-plains that �elites are cosmopolitan, peo-ple are local�. Samuel Huntington, apolitical scientist, argues that � a major gap

is growing in America between its increas-ingly denationalised elites and its ‘thankGod for America’ public.� On Americantelevision personalities such as Lou Dobbsand Bill O’Reilly beat the populist drumagainst those cosmopolitan elites. InChina people denounce returning émigrésas �bananas� (yellow on the outside,white inside). Across much of the develop-ing world the targets of choice for riotersare rich ethnic minorities and foreigners.

But in other ways things have got muchbetter. The number of winners now ismuch larger than it was in 1958. In Young’sday, the meritocrats concentrated on spot-ting recruits for Oxbridge and the seniorcivil service. The rest were labelled fail-ures. Since then, America and Europe havecreated a mass higher education system,and developing countries are determinedto follow suit. When Young was writing,China and India were trapped in poverty.Today they are growing so fast that they,too, are su�ering from talent shortages.

Moreover, some problems could proveself-correcting. Many talented people notonly create jobs and wealth, they turn theirhands to philanthropy, as Bill Gates andWarren Bu�ett have done. The growing re-turns to education create incentives forpeople to get themselves educated, pro-ducing a better-trained workforce as wellas upward mobility. In China familiesspend more on education than on any-thing else, despite the one-child policy.Multinational companies routinely pro-mote local talent in the developing world,putting an ever more multi-ethnic face onthe global talent elite. Overheated talentmarkets prompt companies to move pro-duction elsewhere�to Mysore rather thanBangalore, say, or Austin, Texas, ratherthan Silicon Valley.

Above all, there is something appealingabout the meritocratic ideal: most peopleare willing to accept wide inequalities ifthey are coupled with equality of opportu-nity. In America, where two-thirds of thepopulation believe that everyone has anequal chance to get ahead, far fewer peoplefavour income redistribution than in Eu-rope.

Growing wealth also means that soci-ety can reward a wider range of talents. �I

Meritocracy and its discontents

Not everybody is happy with the talent elite

1


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the lowest rungs of the educational ladder.Developing countries need to continue themarch towards universal primary educa-tion: failure to do so will exacerbate skillshortages as well as widen inequalities.Developed countries need to toughen uptheir schools. In the 1960s too manyschools were lowering standards in thename of child-centred education and shift-ing the emphasis away from science andmathematics. The chief victims of thiswere underprivileged children who couldnot rely on their parents to make up for the

de�ciencies of their schools. The success of advanced economies is

increasingly dependent not on their physi-cal capital but on their capacity to mobilisetheir citizens’ brainpower. The rise of aglobal meritocracy o�ers all sorts of bene-�ts, from higher growth in productivity tofaster scienti�c progress. It can boost socialmobility and allow all sorts of weird andwonderful talents to bloom. The talentwars may be a source of trepidation forcompanies and countries. But they shouldalso be a cause for celebration. 7

must study politics and war that my sonsmay have liberty to study mathematicsand philosophy,� wrote America’s secondpresident, John Adams, and they in turnmust study those subjects so that their chil-dren can study �painting, poetry, music,architecture, statuary, tapestry, and porce-lain�. These days, sports stars and enter-tainers can make millions.There are also ample rewardsfor all sorts of specialised talents,from the gift of bringing history to life(all those well-paid TV historians) tothe ability to produce a perfect sou�é(the best-paid chef in America, Wolf-gang Puck, earned $16m last year). Itsometimes seems that there is no talent sorecondite that you cannot make a livingout of it. Takeru �Tsunami� Kobayashiearns more than $200,000 a year as theworld’s hot-dog eating champion: he caneat more than 50 in 12 minutes.

Making it palatableThe backlash is not inevitable, then. But itis sensible to take steps to prevent it. Onepopular answer is a�rmative action, anidea that is making headway even in thatlast redoubt of old-fashioned meritocracy,the French establishment. However, ex-perience in America�which introducedthe practice in the 1970s�suggests that itraises a host of problems. In practicalterms, many �a�rmative-action babies�fail in highly competitive environments.On a more philosophical note, whyshould the children of rich blacks be givena head start over the children of poorwhites? The biggest problem with a�rma-tive action, however, is that it comes toolate. The best way to boost the life-chancesof poor people is to intervene much earlierin life�to set them on the right path in kin-dergarten and primary school and rein-force those lessons in secondary school.

Progressive taxation can help. For muchof the post-war period most rich countriestaxed talent too heavily, causing bright�ight. But today, in America at least, thedanger is the opposite. The Bush adminis-tration is trying to reduce taxes on bothearned income and inherited wealth at atime when the talented are reaping hugerewards: American CEOs earn 300 timesmore than the average worker. This threat-ens to turn the children of the rich intoplayboys and playgirls and widen in-equalities to unacceptable levels.

The best way to head o� a backlash is togive everybody a fair chance. This meansinvesting in childhood nutrition and pre-school education. It also means repairing

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The battle for brainpower - The Economist · 2017-12-06 · 1 2 A survey of talent The Economist October 7th 2006 2 former masters of the universe were beg- ging for work. Indeed,