The Risky Business of Hiring Stars

he Risky Business of Hiring Stars

Odds are, the superstars you eagerly and expensively recruit will shine much less brightly for you than for their previous employers. Research shows why—and why you’re usually better off growing stars than buying them.

by Boris Groysberg, Ashish Nanda, and Nitin Nohria

If you’re like most CEOs we know, you’re down in the trenches, leading your company’s war for talent from the front. The battle for the best and brightest people may be less fierce than it was five years ago, but, along with the U.S. economy, it’s heating up again. At any rate, you’ve been hiring top performers wherever you could unearth them during the recession; that’s way too important to delay or delegate. And when you do stumble across first-rate talent, you’re willing to offer those stellar executives almost anything to come and work for you: huge salaries, signing bonuses, stock options—whatever it takes.

After all, you’re pretty certain that companies can defeat rivals in the global knowledge economy by deploying better talent at all levels. Only the pick of the class can cope with today’s business world, where executives have to anticipate change, adapt quickly, and make decisions amid uncertainty, right? Besides, A players are ambitious, brainy, dynamic—and charismatic. When you recruit talent from outside the organization, which is inevitable since developing people within the firm takes time and money, why settle for B players? Hitch your wagon to a rising star, and the company’s profits will soar.

That’s a powerful idea, and several books and management gurus have popularized various shades of it over the past decade. In fact, it’s the cornerstone of people management strategies in many companies. There’s only one problem. Like many popular ideas, it doesn’t work.

For all the hype that surrounds stars, human resources experts have rarely studied their performance over time. Six years ago, we started tracking high-flying CEOs, researchers, and software developers, as well as leading professionals in investment banking, advertising, public relations, management consulting, and the law. We observed that top performers in all those groups were more like comets than stars. They were blazing successes for a while but quickly faded out when they left one company for another. Since it wasn’t at all clear why stars were unable to extend their achievements across companies, we decided to delve more deeply into the phenomenon.

We recently completed an in-depth study of 1,052 star stock analysts who worked for 78 investment banks in the United States from 1988 through 1996. For the study’s purpose, we defined a star as any analyst who was ranked by Institutional Investor magazine as one of the best in the industry in any of those nine years. As the sidebar on our methodology explains (see “Methodology to Watch Stars By”), we chose to study Wall Street’s jet set partly because we found data on both their performance and movements between companies. The study was limited to that one group, however, and it’s necessary to be careful about overgeneralizing the implications. Still, our findings were surprising, to say the least.
Sidebar IconMethodology to Watch Stars By

When a company hires a star, the star’s performance plunges, there is a sharp decline in the functioning of the group or team the person works with, and the company’s market value falls. Moreover, stars don’t stay with organizations for long, despite the astronomical salaries firms pay to lure them away from rivals. For all those reasons, companies cannot gain a competitive advantage by hiring stars from outside the business. Instead, they should focus on growing talent within the organization and do everything possible to retain the stars they create. As we shall show in the following pages, companies shouldn’t fight the star wars, because winning could be the worst thing that happens to them.
When Companies Hire Stars

Three things happen when a company hires a star, and none of them bodes well for the organization.
The star’s luster fades.

The star’s performance falls sharply and stays well below his old achievement levels thereafter. Our data show that 46% of the research analysts did poorly in the year after they left one company for another. After they switched loyalties, their performance plummeted by an average of about 20% and had not climbed back to the old levels even five years later. So the decline in the stars’ performance was more or less permanent. There’s no dearth of examples: James Cunningham, who was ranked Wall Street’s top specialty chemicals analyst from 1983–1986, dropped to third place as soon as he left F. Eberstadt for First Boston. Likewise, Paul Mlotok, who specialized in tracking international oil stocks, dropped from number one in 1988 to number three the following year, when he moved from Salomon Brothers to Morgan Stanley.