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Rumors Of War

(September 15, 2003) - Invest the six bucks and download a copy of Capital Versus Talent: The Battle That's Reshaping Business from July's Harvard Business Review. The author, Roger Martin makes a powerful case that the current anxiety about CEO compensation is the first real skirmish in the War for Talent. He cleverly suggests that the conservative fascination with capital is rapidly being replaced by a recognition of the value of Human Capital.

In Martin's view, the much ballyhooed War is underway and will drive the structural dynamics of the 21st Century. Financial Capital, now owned by the working class (through their pension funds) is at odds with Human Capital (talent) which is the leadership (management) of a company and the core group of knowledge workers who create company value. Martin points to the CEO compensation question as the first sign.

It's a fascinating notion. The Talent Wars will reshape the domestic political landscape because big capital is the property of the workers while talent is the property of the leadership class. Venture firms finance human capital while the more risk averse pension funds finance old fashioned capital. The right becomes pro-talent while the left becomes pro-capital.

As shareholders react to the threat the talent class poses, they have taken one strategy right out of labor's book: collectivization. In the United States and Canada, the biggest shareholders are the pension funds, and they have banded together to fight the demands that managers make on companies. In Canada, for example, 19 pension and investment funds, with $350 billion Canadian in assets, formed the Canadian Coalition for Good Governance (CCGG) in June 2002. The coalition has announced that it will use its powers to keep executive compensation in corporate Canada at "reasonable levels."

Shareholder coalitions like CCGG will lobby governments to pass laws that cap CEO salaries. Which political parties do you suppose will support them? The largest shareholders are pension funds, which primarily invest the savings of the working class. Clearly, it will be the Left that supports capital—especially because there is no love lost between the Left and CEOs. The talent class might be the modern equivalent of the "people" class, but its members are part of the richest segment of society. Thus, the Right will back the talent class. It's an interesting twenty-first-century twist because left-of-center parties had historically supported labor and right-of-center parties had supported capital.

Battle-scarred shareholders have several other strategies to combat talent, although it isn't clear they will be effective. Shareholders will continue to co-opt talent through stock-based compensation, believing that owning stock will inhibit managers from asking for greater compensation. It won't. Every manager believes that an increase in his or her compensation will lead to a negligible fall, if any, in the company's stock price. So, though managers may own stock in their companies, they will continue to ask for higher nonstock compensation as well.

Several corporations have moved back-office functions like payroll accounting to developing countries like India and the Philippines in the past decade. They are now shifting knowledge-heavy tasks like R&D as well because engineers and scientists are abundantly available in those countries. Relocating those functions will help companies beat back the demands of highly skilled professionals in the United States. However, the tactic may not work in the long run because multinationals and local companies will compete for the best people in those talent markets, which will erode salary differences. Already, the salaries of software engineers have shot up in Bangalore, the center of India's software industry, which has forced multinational companies to move their base of operations to other parts of the country.

Above all, shareholders will want to prevent managers from skimming the profits from the company's patents, brands, know-how, and customer relationships. That effort will pose a peculiar challenge because the shareholders' only allies in managing companies until now have been CEOs and senior managers—card-carrying members of the same talent class that has declared war on shareholder capitalists.
- Roger L. Martin, HBR, July 2003

- John Sumser © TwoColorHat. All Rights Reserved.

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