2001. A year of great upheavals
The year 2001 will go down in history as a time of unexpected collapses and global cataclysms. While the Twin Towers collapsed in a terrorist attack that would change world geopolitics forever, another giant also fell, albeit in the corporate world: Enron, the former jewel of innovation in the energy sector, collapsed in one of the most scandalous bankruptcies of all time.
What seemed an indestructible company collapsed not only because of financial fraud, but also because of a toxic culture of talent management, created on the principles of the “war for talent” promoted by McKinsey. Enron did not fall alone: it took with it the confidence in the markets, the stability of thousands of employees and the myth that ruthless talent selection breeds success.
And it led to the demise of Arthur Andersen, until then considered the world’s most prestigious professional services firm.
This is the story of how a supposedly infallible management model ended up destroying one of the most admired companies in the United States and why today, more than ever, it is urgent to rethink our understanding of talent in organisations.
The Enron case: when the search for the “best talent” led to disaster
In 2001, McKinsey partners Ed Michaels, Helen Handfield-Jones and Beth Axelrod published the well-known book “The War for Talent”, which sets out the fundamental foundations of the iconic American firm’s talent management model. The central idea of the book is that talent is a scarce resource and that companies must compete aggressively to attract and retain the best employees.
McKinsey & Company’s influence on Enron’s talent management practices is undeniable. Not only because it was Enron’s strategic consulting firm for more than 16 years, but also because Jeffrey Skilling, Enron’s CEO in its final stage, was a former McKinsey consultant and a leading proponent of the talent management model based on extreme competition and accelerated promotion of “star” employees.
Under his leadership, Enron implemented a forced employee evaluation system known as “Rank and Yank”, a system that classified employees into three categories with direct career consequences:
- The “Top Talent” 20%, comprised of employees considered “high potential”, received substantial bonuses and accelerated promotion opportunities. Enron applied an accelerated leadership rotation model, in which “Top Talent” stayed no more than two to three years in one position before being promoted or moved to another department. These employees were expected to take big risks and be “change agents”, fostering a culture of innovation and aggressive decision-making….
- The 70% of intermediate performers were simply required to fulfil their responsibilities without additional incentives. These employees were under constant pressure, as they knew that any drop in performance could cause them to fall into the low performance category and jeopardise their jobs.
- The lowest performing 10%: Each year, the bottom 10% of employees were automatically dismissed, in a process designed to “weed out mediocrity” within the company.
The consequences of implementing “Rank and Yank” had devastating effects. Instead of boosting performance, it destroyed the company’s internal cohesion, fostered a high-risk culture and undermined ethical values, contributing directly to the organisation’s bankruptcy in 2001.
For the 20% of “star” employees, the accelerated turnover and pressure for short-term results led to excessive financial risk-taking and unethical practices. By changing positions every two or three years, managers never took responsibility for their decisions, creating an irresponsible leadership system based on speculation and manipulation of data.
The 70% of middle performers suffered demotivation and frustration, feeling left behind with no real opportunities for growth. In addition, the threat of annual layoffs created a culture of paranoia and extreme competition, where employees sought to excel at any cost, including sabotaging and tripping their peers.
For the lowest performing 10%, the system meant constant fear and extreme pressure to avoid dismissal. This led to mental blocks, desperate decisions and loss of valuable talent, as many employees chose to leave the company rather than fall victim to an evaluation process perceived as unfair and arbitrary.
The ultimate impact was disastrous: ethics took a back seat, collaboration faded, and irresponsible decision-making became the norm. With no accountability and leaders focused only on immediate profit, Enron collapsed under the weight of its own toxic culture, proving that extreme competition and fear are sure recipes for failure.
Our critique of this talent management model
Despite the failure of the Enron collapse, some aspects of the talent management model developed by McKinsey are still valid in many large companies, which continue to assume that talent is a scarce commodity in the organisation and that business excellence is achieved by selecting a small group of employees as a “talent pool”.
Although, fortunately, the model is not usually taken to the extremes that Enron took it to, we believe it is time for a review of corporate talent management models based on the following premises.
1. Talent is not a scarce commodity: The idea that only 20% of employees have “talent” is absurd. If this were true, no company would function. To call a small group of employees “talented” is to insult the rest and to demotivate them for free.
The real proportions are probably reversed and it is probably 80% of our workforce that really have talent and that we need to nurture and retain. Because no organisation can succeed solely on the commitment of 20% of its employees. However talented they may be.
2. There is no single type of talent: like so many other concepts generated in McKinsey’s idea factory, the idea of talent in “The War for Talent” is defined from a limited vision of strategy consultants, and is centred on management skills and strategic analysis. But there are many types of talent in a company: technical, creative, interpersonal and operational skills, all critical to success. And the company has to be able to know its employees, understand their talents and offer each one the opportunity to do their best and achieve fulfilment in their work.
A management career cannot be the only alternative that companies offer their employees. There are many ways to grow professionally, some are related to becoming a manager, others are related to achieving mastery in what one does. Companies need to be able to create different types of careers and offer growth possibilities to all their employees.
3. Early selection of leaders also has more drawbacks than advantages: First, because talent assessments are not infallible. Daniel Kahneman demonstrated in his studies on leadership in the Israeli army that selection tests have little ability to predict the actual performance of officers on the battlefield. Harvard Business School professor Michael Beer has shown in his research that early success for managers can lead to overconfidence, arrogance, lack of adaptation and blindness to their own weaknesses. In fact, early success is one of the main causes of managerial failure.
Selecting a 25-year-old as a top talent and offering him a fast track managerial career, putting him in charge of teams much more experienced than he is, is likely to do more harm than good.
4. Firing 10% of the workforce every year is barbaric: an employee who works in a company with this system for five years has a 50% chance of being fired, simply because he or she has had a bad year. This creates a culture of fear that scares away real talent and destroys organisational trust.
5. Ethics and engagement are critical: The authors of “The War for Talent” completely ignored the impact of employee ethics and engagement. We need more humane companies that value employee ethics and engagement and also behave towards them in a reciprocal way.
A new paradigm in talent management
Models based on “The War for Talent” are hardly compatible with the human and business reality of our times. They undoubtedly respond to a business management model in which talent is perceived as a scarce resource and represent a sublimation of human differences.
We cannot build our organisations as places where there is an elite that drives and a large majority that has to obey and not give too much trouble.
Necessarily, we need to turn our talent management systems upside down. This is not a war, but a collective construction.
It is time to move beyond the myth of the elite and build work environments where all our employees can achieve fulfilment.