Every company understands how crucial return on investment is. But how many view return on talent the same way?
Employees represent both an organization’s largest investment and its deepest source of value. In a world where businesses are navigating economic uncertainty, rapid technological change, and upheaval in the working model, it’s important that their talent systems emphasize both productivity and value creation. Having the right talent in the right roles—and giving employees the support and opportunities they need to succeed—is critical to achieving returns.
McKinsey research indicates that companies that put talent at the center of their business strategy realize higher total shareholder returns than their competitors.
In this article, we focus on five actions that organizations can take to maximize their return on talent: build a skills-based strategic workforce planning capability, create a hiring engine that brings in the right talent to fill critical roles, invest in learning and development, establish a stellar performance-oriented culture, and elevate HR’s operating model to become a true talent steward.
It’s not enough to take one or two of these actions in isolation. But together, these five components intersect with and reinforce one another—skills-based hiring, for example, should be supported by tailored learning journeys and performance evaluations that provide clear and timely feedback on skills development.
When combined, these five actions can help leaders establish a truly strategic and less siloed talent system that generates higher returns over the long term.
Talent + productivity = value
Measuring the return on talent has been a long-standing challenge for companies because it’s so difficult to calculate individual productivity in many roles, and it’s equally hard to track progress and improvement over time. How does an organization that is beginning to overhaul its talent approach quantify such an intangible asset?
McKinsey research indicates that when the revenue per full-time employee of high-performing companies is compared with that of similar companies within their industry that are average performers, there is a wide disparity in the revenue productivity of employees. In other words, the revenue generated per employee differs greatly.
Yes, revenue per employee is a blunt instrument, and it is influenced by factors beyond productivity, including brand name and go-to-market approach, market share, type of products and services offered, and operating model. Still, even when comparing like-for-like companies on the productivity of corporate function employees—where work should be comparable—our research gleaned from years of benchmarking suggests that there are significant gaps in employee productivity across companies.
New McKinsey analysis digs into these productivity differences to identify and measure lost productivity. We found that there are three clear (and measurable) reasons for a lack of productivity among individual employees:
- They don’t have the skills needed to be successful in a role (the skill gap).
- They aren’t engaged or energized by the work (the will gap).
- They spend time in ways that don’t increase value, such as poor prioritization and low-value meetings (the time gap).
All three root causes of productivity loss can remain invisible to an organization’s leaders. While attrition rates have fallen since the height of the COVID-19 pandemic, disengagement levels remain high—with significant consequences for workforce productivity and value creation, McKinsey research shows. As employee satisfaction falls, so do levels of engagement, performance, and well-being.
If left to fester, these root causes can reduce the output an organization gets from its workforce and can lead to broader problems that manifest as two core talent “symptoms”: costly attrition and vacancy rates. Combined, these five factors could cost a median-size S&P 500 company roughly $480 million a year in lost productivity, our analysis shows (Exhibit 1).
By the time an organization is experiencing chronic attrition and vacancy rates, it’s very late in the game to solve for individual causes of dissatisfaction and disengagement. The problems have become systemic.
Many companies are currently experiencing lower attrition; in fact, some executives and talent leaders say it might be too low, particularly in some functions and roles. These moments of calm, when the symptoms of attrition and vacancy are less costly, are not a reason to rest. Indeed, labor markets’ impact on attrition may simply be masking ongoing productivity issues.
How to craft a high-performing talent system
Now is the time to go after the root causes of lost productivity and establish a higher-return talent system. But organizations and talent leaders can’t focus just on piecemeal improvements. They should instead address the root causes head-on and adopt a data- and financials-driven approach to talent management that monitors and reduces productivity loss.
A holistic strategy integrates five elements across the talent landscape (Exhibit 2).
Identify who you need to win
A first step is getting a clear picture of the skills and capabilities, as well as the structure and head count, needed to deliver a company’s strategy and meet its ambitions and targets. What is the gap between where the company is and where it wants to go? What skills and capabilities are needed to get there at the greatest level of productivity?
This goes beyond classic operational workforce planning. Instead, companies start by clarifying the roles and skills that are critical to delivering the business strategy. Once leaders have a sense of what talent pools, roles, and skills matter, they can see the baseline of the current workforce and what they need to do to close gaps. Matching the best-fit talent to the most critical roles gets disproportionate value from existing talent. Indeed, McKinsey research shows that individuals who are top performers in highly critical roles deliver 800 percent more productivity than average performers in the same role.
Leading companies are moving beyond even this strategic approach to workforce planning, integrating it with broader talent considerations that are critical to productivity—asking, for instance, where talent should be located, from both a skills availability and an efficiency perspective. They are delving into what level and seniority of talent they need—and can afford—to achieve the workforce they want.
Generative AI (gen AI) may make it easier for organizations to identify current and expected skills gaps based on market changes. The technology can also help leaders build a role and skill taxonomy, which, when combined with a robust skills inventory of the current organization, can help future-proof talent planning.
A global financial-services company took a hard look at the current state of its workforce relative to future needs and recognized that a significant shift was needed to adapt to a more digital future. To achieve that within its margin goals meant broadening its talent approach from hiring primarily in high-cost financial centers. Instead, it took steps to help existing employees develop necessary digital skills and built pools of digital talent by expanding to a global hiring approach.
Create a hiring engine to compete for talent
Attracting top talent to fill critical roles is a perennial challenge for companies. In fact, McKinsey executive surveys consistently find that senior leaders worry about their ability to recruit highly talented people.
To create a fast-moving, effective hiring engine, companies are creating talent win rooms—gathering key stakeholders from across different functions and HR to think holistically about the candidate experience. Based on their assessment, leaders in these talent win rooms may decide to expand the talent pool by looking at candidates who have been skilled through alternative routes, revising job descriptions, or streamlining the hiring process.
Setting up data-driven dashboards can help those in talent win rooms make informed decisions about all elements of the hiring process. This group can use AI and other analytics to rapidly assess the company’s employee value proposition (EVP)—the pitch on what it’s like to work there. Organizations that do the hard work of assessing the core elements of their EVP and making the right changes to attract critical profiles will reap the rewards by attracting the best people.
McKinsey research shows that tech talent is especially interested in on-the-job opportunities to develop and learn new skills, for example, so focusing an EVP on growth and development potential may be critical for finding and keeping those with digital skills.
Companies are also starting to open the aperture when it comes to determining how certain skills map with their workforce needs. They are looking not just at candidates’ existing credentials and experiences but also at how they can be upskilled into current and future roles based on skill adjacencies, or how skill sets from previous roles may be complementary to those required by new roles.
In a still-tight labor market, companies have widened their hiring process to those who have strong skills but not necessarily a traditional résumé based on a four-year degree and have significantly expanded their sourcing pools both in terms of quantity and diversity.
Once again, gen AI will have an increasingly important role to play in talent attraction. Gen AI is already reshaping recruiting by helping managers write better job requirements and by matching candidates with skills pools. Analytics can also help identify where in the hiring pipeline recruits may drop off and optimize the hiring journey through personalized content and seamless onboarding.
A large software and service company was struggling to attract top digital talent in a competitive market. It began an effort to redesign its EVP and hiring engine, as well as its external branding. It took a candidate-centric approach to its recruitment redesign, developing its digital culture through tech meetups and talks. It also created a jobs architecture and review process that emphasized growth and career paths typically available only at technology companies. As a result, the company was named the top workplace for digital talent in the state. It also experienced a 15-fold increase in the number of employees hired in three years and a 75 percent reduction in time spent from application to hiring.
Focus learning and development programs on the highest-return journeys
McKinsey talent trends research indicates that skills development and the opportunity to apply those skills at work, as well as the chance for advancement, are among the top reasons employees decide to stay at their jobs. A company’s focus on continuous learning can help it engage its workforce and keep pace with change. However, despite billions of dollars spent, many training programs don’t measurably improve business performance.
When done well, continuous learning can address core reasons for productivity loss: when people don’t have the right skills to deliver in their current roles or they lack the skills they need for longer-term success.
Organizations that can identify the capabilities they need for the future are able to build tailored, skill-based learning journeys. Focusing on those journeys that can yield the highest returns is more cost-effective than building traditional cohort- or role-based journeys. In addition, finding ways to reskill and equip existing employees to take on new roles cuts down on recruiting costs.
In our experience, the most effective organizations encourage personalized, adaptive learning. Employees are motivated to own their journeys by deciding which skills and areas of expertise they want to focus on. They are given feedback, along with coaching and peer-learning opportunities, and they are supported by a digital ecosystem that can help them track their progress over time.
When companies shift their cultures to be development-focused, employees tend to feel more productive, adaptable, and valuable, helping with attraction and retention rates over the long term.
To better prepare its growing workforce for current and future skills needs in a rapidly changing technology landscape, Walmart established a learning academy with more than 200 training facilities across the United States for associates and managers, covering on-the-job skills, future skills, and leadership skills. The company also instituted a free college degree or trade skilling program for associates, ensuring that its employees have pathways to develop and that they feel empowered with the right skills to perform.
Make people and performance your organizational mantra
When employees work together to ignite passion and tap into purpose, individual, team, and company performance improve. Building a strong performance culture involves two streams: instituting clear accountability mechanisms and improving employee experience. The goal is to create an enabling, inclusive culture that also has a performance edge.
A strong performance management system consistently reinforces rewards and consequences. People who are disproportionately productive must be recognized, otherwise they may become demoralized and leave. And when low-productivity employees see few consequences, it is equally demoralizing to those who are responsible for greater output.
Organizations can define the behaviors that lead to strong business performance and communicate them clearly so that employees know what they look like in practice. McKinsey research on organizational health shows how strong the ties are between management practices and a stronger performance culture. How effectively leaders “run the place”—how they make decisions, allocate resources, and lead their teams—builds better organizational health, which, in turn, delivers three times the total shareholder returns of unhealthy organizations, regardless of industry.
High-performance cultures also remove barriers to change and peel away layers of bureaucracy. These include inefficiency factors that increase disengagement and attrition, such as slow decision making, pointless meetings, and other impediments to getting things done. Companies can increase the productivity of their talent by streamlining decision rights and increasing decision velocity. They can also use this moment as an opportunity to rewire their operating models by pushing decision rights as close to the action as possible, while explicitly giving leaders the autonomy to deliver.
A global pharmaceuticals company wanted to use the performance management process to increase collaboration and align the organization behind its values, purpose, and business goals. It began by implementing a new approach to goal setting in which all employees had goals tied to three strategic areas that would be graded in their performance reviews.
Because the company wanted teams to pursue stretch goals, it prioritized rewarding progress toward stretch goals rather than achieving more attainable goals. It also invested in calibration and cross-functional syndication of goals by ensuring that peers and teams with interdependencies aligned on outcomes and had input into one another’s goals. This helped spur collaboration and accountability.
Finally, in a move to improve leadership behaviors, it based performance reviews on a 50-50 split between reaching performance goals and demonstrating leadership behaviors. It developed a 360-degree review process wherein individuals were rated against key leadership behaviors, making the results transparent so employees knew where they stood and managers could see a stacked ranking of how team members were performing. That shift spurred higher performance across the organization and raised accountability for leaders in their most critical job: developing their people.
Turn HR into the talent steward
In a higher-return talent system, HR becomes a strategic partner with the C-suite, ensuring that talent is a company-wide priority. HR transitions from a cost center to a true value creation center. To support the four actions cited earlier, HR can take several steps to transform its own operating model.
First, HR can establish a more agile operating model to deliver on the increasingly strategic role required of it. The most effective HR organizations build agility into their operating models—typically with cross-functional flow-to-the-work resources. The goal is to focus on user experience, offer strategic expertise and insights, and create an operational and tech backbone that delivers.
Second, HR can further strengthen its data- and people-analytics capabilities so it can rapidly share the insights that matter most to business unit and function leaders. People analytics can help HR identify and reduce time inefficiencies by empowering staff—particularly middle managers, who are often plagued by meeting overload—to pare back the number of meetings they are involved in.
People analytics can help find organizational problems and bottlenecks and solve for them quickly. If there’s a problem with attrition, where is it worse and in what roles? Are longtime employees leaving because they’re not getting promoted? Are they parents who need more flexibility to meet family obligations? These are different problems with different potential solutions.
Third, and crucially, HR plays an essential role in connecting the talent strategy to the organization’s overall business strategy. For example, it can ensure that strategic workforce planning is integrated with financial planning, not walled off as an exercise only for HR. By having HR work in tandem with finance, the organization has much higher visibility into costs and can pursue significantly better annual planning.
A multinational financial company’s HR function suffered from misaligned leadership, unclear roles and responsibilities, and a poor reputation among employees, who viewed it as more focused on compliance than on problem solving. A diagnostic that took input from across the organization yielded strategic and operational changes to align HR fully with business priorities and deliver tangible employee outcomes through cross-functional resources.
HR’s operating model was redesigned to emphasize team norms and new ways of working. Accountability and decision rights were clarified to enable speed and accuracy. A quarterly review process now identifies priority activities and brings in experts from centers of excellence as needed. The operating model also monitors the systems and tools required for continued success, including a dedicated process improvement squad when capability gaps are identified. As a result of all these changes, HR has become a high-performing function, operating with discipline and speed, that acts as a strategic partner with the business.
An organization that views its employees as its most important resource can maximize its return on talent by following a holistic strategy—with HR in the driver’s seat. Analytics-backed hiring, continuous learning, and a high-performance culture make people feel supported, energized, and productive. This integrated talent approach draws people in and keeps employees satisfied, boosting organizational performance along the way.
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