How To Create Talent Density

In this (long) article, I want to talk about a new concept called Talent density. And as I pondered the concept I think it represents one of the more important topics in management. So I hope you find it as interesting as I do.

First of all, the concept of talent density, pioneered by Netflix by the way, is simple.

Talent Density is the quality and density of skills, capabilities and performance you have in your company.

So, if you have a company that is 100% high performers, you’re very dense. If you have a company that’s 20% high performers, you’re not very dense. It’s easy to understand, but hard to implement, because it gets to the point of how we define performance, how we select people to hire, how we decide who’s going to get promoted, how we decide who’s going to work on what project and how we’re going to distribute pay.

So before I explain talent density, let’s talk about the basic beliefs most companies have. Most organizations believe that they’re operating with a normal distribution or bell curve of performance. I don’t know why that statistical model has been applied to organizations, but it has become almost a standard policy. (Academics have proven it false, as I explain below.)

Using the bell curve, we identify the “mean” or average performance, and then categorize performance into five levels. Number ones are two standard deviations to the right and number fives are two standard deviations to the left.

The people operating at level one get a big raise, the people operating at level two get medium raise, the people operating at level three get an average raise, the people operating at level four get a below average raise and the people operating at level five probably need to leave. Lots of politics in the process, but that’s typically how it works.

As I describe in The Myth of The Bell Curve, these performance and pay strategies have been used for decades. And at scale they create a mediocrity-centered organization, because the statistics limit the quantity and value of 1’s. If you’re operating at 1 level and you get a 2, you’ll quit. If you’re operating at 3 level, you’re probably going to coast. You get my drift. And since the bulk of the company is rated 2 or 3, most of the managers are in the middle.

As the saying goes, A managers hire A people, B managers hire C people. So over time, if not constantly tuned, we end up with an organization that is almost destined to be medium in performance.

Now I’m not saying every company goes through this process, but if you look at the productivity per employee in large organizations it’s almost always below that of smaller organizations. Why? Because as organizations grow, the talent density declines. (Netflix, as an example, example, generates almost $3M of revenue per employee, twice that of Google and 10X that of Disney. And they are the only profitable streaming company, with fewer than 20,000 employees and a $240 billion market cap.)

The traditional model was fine in the industrial age when we had a surplus of talent, jobs were clearly defined, and most employees were measure by the “number of widgets they produced.” In those days we could swap out a “low performer” for a “high performer” because there were lots of people in the job market.

We don’t live in that world anymore. The world we now live in has sub 4% unemployment, a constant shortage of key skills, and a growing shortage of labor. And thanks to automation and AI, the revenue or value per person has skyrocketed, almost an order of magnitude higher than it was 30 years ago.

So we need a better way to think about performance in a world where companies with fewer people can outperform those who get too big. Look at how Salesforce, Google, Apple, who are essentially creative companies, have slowed their ability to innovate as they get bigger. Look at how OpenAI, who is a tiny company, is outperforming Google and Microsoft.

Today most businesses outperform through innovation, time to market, customer intimacy, or IP – not through scale or “harder work.”

How do we maintain a high level of talent density when we’re growing the company and hiring lots of people? Netflix wrote the book on this, so let me give you the story.

First, the hiring process should focus on talent density, not butts in seats. Rather than hire someone to “fill a role” we look for someone who is additive or multiplicative to the entire team. Hire someone that challenges the status quo and brings new ideas, skills, and ideas beyond the “job” as defined. Netflix values courage, innovation, selflessness, inclusion, and teamwork, for example. These are not statements about “doing your job as defined.”

Netflix’s idea is that each incremental hire should make everybody else in the company and everybody else in the team produce at a higher level. Now this is a threatening thing for an insecure manager because most managers don’t want to hire somebody that could take their job away. But that’s why we have this problem.

Second, we need to manage or create some type of performance management process that is built around the Pareto distribution (also called the Power Law) and not the normal distribution. In the Pareto distribution or the power law, we have a small number of people who generate an outsized level of performance, you can call it the 80/20 rule or the 90/10 rule. (20% of the people do 80% of the work)

Studies have shown that companies and many populations work this way, and it makes sense. Think about athletes, where a small number of super athletes are 2-3 better than their peers. The same thing is true in music, science, and entertainment. It’s also true in sales and many business disciplines.

Research conducted in 2011 and 2012 by Ernest O’Boyle Jr. and Herman Aguinis (633,263 researchers, entertainers, politicians, and athletes in a total of 198 samples). found that performance in 94 percent of these groups did not follow a normal distribution. Rather these groups fall into what is called a “Power Law” distribution.

In every population of human beings there are a few people who just have God-given gifts to outperform in the job, and they just naturally seem to be far better than everyone else.

Bill Gates once told the company that there were of the three engineers that he felt made the company of Microsoft. And I’ve heard this in many other companies, where one software engineer and the right role can do the work of 10 other people.

Now, this is not to say that everybody will fall into one level of the Pareto distribution. At a given point in time in your career, you may be in the 80% and over time, as you learn and grow and find the things that you’re naturally good at, you’ll end up in the 20%. But in a given company this is a dynamic that’s constantly taking place. And that’s what Netflix is doing – constantly working on talent density.

What does this mean for performance management? It means that in order to care for a population like this, we have to hire differently, avoid the bell curve, and pay high performers well. Not just a little more than everybody else, a lot more. And that’s what happens in sports and entertainment, so why not in business.

If you look at companies like Google, Microsoft, and others, there are individuals in those companies that make two to three times more than their peers. And as long as these decisions are made based on performance, people are fine with it.

What obviously does not work is when person making all the money is the person who’s the best politician, best looking, or most popular.

And that leads me to item three: In the Netflix culture there’s a massive amount of empowerment, 360 feedback, candor and honesty. You’ve probably read the Netflix culture manifesto: it’s all about the need for people to be honest, to speak truth, to give each other feedback, and to focus on judgement, courage, and accountability. Netflix only recently added job levels: they didn’t have job levels for many years.

Giving people feedback is a challenge because it’s uncomfortable. So this has to to start at the top and it has to be done in a developmental, honest way. This does not mean people should threaten or disparage each other, but we all need to know that at the end of a project or the end of the meeting it’s okay for somebody to tell us “here’s what was great about that and here’s what wasn’t great about it.”

One of the most important institutions in the world, the US military lives, eats and dies by this process. If you’re in the military and you mess something up, you can guarantee that somebody’s going to tell you about it, and you’re going to get some help making sure you don’t do it again. We don’t have life or death situations in companies, but we can certainly use this kind of discipline.

The fourth thing that matters in talent density is leadership and goal setting. One of the things that really gets in the way of a high performing company is too many individual goals, too many siloed projects and responsibilities and people not seeing the big picture.

If your goal setting and performance management process is 100% based on individual performance you are sub-optimizing your company. Not only does this work against teamwork, but there really isn’t a single thing in a company that anybody can do alone. So our performance management research continuously shows that people should be rewarded for both their achievements as well as that of the team. (Here’s the research to explain.)

Why is talent density important right now? Let me mention a few reasons.

First, we’re entering a period of low unemployment so every hire is going to be challenging. And thanks to AI, companies are going to be able to operate with smaller teams. What better time to think about how to “trim down” your company so it’s performing at its best?

Second, the transformations from AI are going to require a lot of flexibility and learning agility in your company. You want a highly focused, well aligned team to help make that happen. And while AI will help every company improve, your ability to leverage AI quickly will turn into a competitive advantage (think back about how web and digital and e-commerce did the same).

(I firmly believe the companies with the most ingenious applications of AI will disrupt their competitors. I’m still amazed at Whole Food’s hand recognition checkout process: I can see self-service coffee, groceries, and other retail and hospitality coming.)

Third, the post-industrial business world is going to start to devalue huge, lumbering organizations. Many big companies just need a lot of people, but as Southwest Airlines taught us long ago, it’s the small team that performs well. So if you can’t break your company into small high-performing teams, your talent density will suffer.

When the book is written on Apple’s $10 Billion car, I bet one problem was the size and scale of the team. We’ll see soon enough. By the way, I still recommend everyone read “The Mythical Man-Month,” which to me is the bible of organizing around small teams.

What if you’re a healthcare provider, retailer, manufacturer, hospitality company? Does talent density apply to you? Absolutely! Go into a Costco and see how happy and engaged the employees are. Then go into a poorly run retailer and you’ll feel the difference.

In my book Irresistible I give examples of companies who embrace what I call “the unquenchable power of the human spirit.” Nobody wants to feel like they’re underperforming. With the right focus on accountability and growth we can help everyone out-perform their expectations.

Now is a time rethink how our organizations work. Not only should we promote and reward the hyper-performers, the Pareto rule and Talent Density thinking encourage us to help mid-level performers learn, grow, and transform themselves into superstars.

Let’s throw away the old ideas of bell curve, forced distribution, and simplistic performance management. Companies that push for everlasting high performance are energizing places to work, they deliver outstanding products and services, and they’re great investments for stakeholders.

Additional Information

Welcome To The Post-Industrial Age (research)

The Myth Of The Bell Curve

We Wasted Ten Years Talking About Performance Ratings. The Seven Things We’ve Learned.

The Changing Face Of Total Rewards (Certificate Course)