The War for Leaders - next generation of just 45 million. The War for Leaders. 3 looming leadership drought. It ranks the top companies for leadership and

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  • The War for LeadersHow to prepare for battle

  • Contents

    The War for Leaders 1

    2007 Hay Group. All rights reserved www.haygroup.com

    The problem that is not going to go away 2

    The top 20 companies 4

    The seven practices that make the difference 8

    Commitment to leadership development 10

    Preparation is the key to winning the war for leaders 14

  • Th e situation is the same in Europe. Even though the evidence for a leadership drought is overwhelming, many major companies are still not prepared to meet the challenge. In the words of Hay Groups Mary Fontaine this is not a tsunami that will take us by surprise, it is like a Hurricane Katrina, which we can see coming but are woefully unprepared for.

    Without the generation that has steered many of them to success, major organizations could soon be embroiled in a scramble for the people with the right leadership qualities. Moreover, the still expanding populations of the developing world will not provide the answer. Th eir economies are booming and demand for leaders is outstripping supply there too. Corporate raiders from the West may fi nd their cheque books are being matched by big business in the East.

    Organizations that are not developing their own leaders now will be forced to recruit from outside. Handled with care this can be a productive strategy but it carries higher risks and encourages a promiscuous job culture lacking in loyalty. With an ever shrinking pool of talent to choose from, the stakes and the costs will be even higher.

    Even with the looming deadlines, many organizations are leaving it late to develop a healthy supply of leaders. Yet good practices abound and organizations who have invested in leadership development are seeing a handsome return on their investment.

    But who is getting it right? Which organizations are developing more, better leaders faster? Hay Groups survey for 2006, in partnership with Chief Executive magazine, sheds light on the

    The problem that is not going to go away

    The baby boomer generation is about to retire en masse. Some 75 million workers in the US will retire in the next fi ve to 10 years and with them 50 per cent of the CEOs of major organizations. The available talent to replace them will need to be picked from the next generation of just 45 million.

    The War for Leaders

  • 3

    looming leadership drought. It ranks the top companies for leadership and identifi es what they are doing that the rest are not.

    Th e survey underscores many of the fi ndings from 2005. Th e companies with the best quality leadership are those that are concentrating on developing their own talent. In particular the top 20 are focusing their eff orts on identifying and managing the talents of high potential candidates the population on whose shoulders much organizational leadership is going to fall. With fewer high potentials to go round they are going to be a very valuable asset indeed.

    Th e top 20 are no diff erent to the remaining companies when it comes to the frequency of practices they provide for mid-level and senior-level managers. However where they diff er is in the amount of eff ort they concentrate on the high potential individuals they have identifi ed. In actively managing their

    high potentials the top 20 companies are more likely to:

    have a formal process in place for identifying individuals who are likely to assume leadership roles in the futureprovide career tracks for high potential professionals or individual contributors that are separate from those for high potential leadersprovide formal programs that are designed to accelerate the leadership development of high potentials the provision of stretch assignments developmental job rotations which take them out of their comfort zoneinclude marketing as an organizational function from which they get their high potentialsfi ll mid-level positions with internal candidatesfi ll senior positions with internal candidatesPromote CEOs from within.

    The companies with the best quality leadership are those that are concentrating on developing their own talent.

    2007 Hay Group. All rights reserved www.haygroup.com

  • The War for Leaders

    Leaders in a variety of roles were also asked to rate their peer companies on the quality of their talent management.

    The top 20 companies

    2006 Top 20 Best Companies for Leaders

    2005 Top 20 Best Companies for Leaders

    1 General Electric (4) 1 Procter & Gamble

    2 Procter & Gamble (1) 2 PepsiCo

    3 PepsiCo (2) 3 IBM

    4 Citigroup 4 General Electric

    5 Johnson & Johnson (5) 5 Johnson & Johnson

    6 HSBC Holdings 6 Dell

    7 BASF (13) 7 Microsoft

    8 Home Depot (8) 8 Home Depot

    9 IBM (3) 9 JPMorgan

    10 Coca-Cola 10 Motorola

    11 Dell (6) 11 Pfi zer

    12 Microsoft (7) 12 FedEx

    13 Novartis 13 BASF

    14 Verizon Communications (14) 14 Verizon

    15 Nestl 15 BAE Systems

    16 Lockheed Martin 16 Johnson Controls

    17 GlaxoSmithKline 17 Siemens

    18 Amgen 18 BP

    19 Hewlett-Packard 19 LOral

    20 BAE Systems (15) 20 Colgate-Palmolive

    Hay Group surveyed 1,279 leading companies worldwide. Of those, 564 companies completed the survey. Th e ranking was compiled by asking companies how well they rated the eff ectiveness of leadership development in their own organization and whether they felt they had enough of the right kind of leaders to take their business forward. Leaders in a variety of roles were also asked to rate their peer companies on the quality of their talent management.

    Finally a number of leading executives from global search fi rms and academics specializing in leadership, were asked a variety of questions about the best companies for leadership development.

    Th e 2006 survey was more comprehensive than that of 2005 and generated an even higher level of response a sure sign that this is an issue that is beginning to attract attention beyond the HR department.

  • 5

    One study noted that general managers who created high performing, energizing climates outperformed those who created neutral or de-motivating climates, delivering margins double their size.

    2007 Hay Group. All rights reserved www.haygroup.com

    Nearly half the companies from last year failed to make the list this year. Partly this is due to the 2006 survey providing a more competitive fi eld of participants, but it may also refl ect the desire of major organizations to institute more formal leadership development which in turn is refl ected in better results. So although the names may have changed an unwavering commitment to leadership development amongst the worlds top companies remains much the same.

    Do demographics matter?Does it matter that there are going to be 30 million less workers in the US and a similar drop in Europe from which to draw the next generation of leaders? After all, we are only talking about a handful of CEOs. Surely there must be enough great leaders in those millions? Unfortunately the pool of talent is shrinking proportionally with the overall loss of workforce making it hard to fi nd quality.

    Th e Corporate Leadership Council reports that 97 per cent of organizations report signifi cant leadership gaps and 40 per cent of them say that the gaps are acute. Th e National College of School Leaders has announced that the UK is running out of head teachers. Th e American Medical Association is concerned that 60 per cent of the CEOs of Americas largest healthcare systems may retire in fi ve years. In the US a total of 5075 per cent of senior management is eligible for retirement by 2010 including 50 per cent of CEOs. If they cannot be replaced by leaders of suffi cient quality, where does that leave business or the education sector?

    Boom time in the East, but not for leadersIn sheer population terms the developing countries of the East might seem to provide a solution. However leaders are not in limitless supply there either. Populations may be rising but the exploding economies of the East mean that demand for leaders is high there too. According to Th e Economist senior managers in India and China are particularly scarce.

    In Bangalore, the outsourcing capital of the world, wage infl ation is climbing by 20 per cent per year and job turnover is 40 per cent. Th en there is the question of quality. Several Indian companies have had to bring in Western CEOs: the Tata Group, for example, has put Raymond Bickson, a Hawaiian, in charge of its hotel business. So corporate raiders from the West using their fi nancial fi repower may fi nd they face a battle to hold on to their own talent.

    Who needs good leaders? In terms of productivity, more than 60 years of Hay Group research shows that good leadership makes a signifi cant diff erence to bottom line performance. One study noted that general managers who created high performing, energizing climates outperformed those who created neutral or de-motivating climates, delivering margins double their size.

    Th is opinion is clearly shared by the top 20 companies in the survey. Th ey had more leaders than the average, were happier with their quality and more committed to leadership development.

  • Th e result of more motivated workers is demonstrated nowhere more clearly than in the bottom line itself. Th e fi ve year annualized returns of the 20 top companies are signifi cantly greater than those of the rest in the S&P 500.

    Leadership itself has risen in value too. Th e value of intangible assets, which include everything from skilled workers to patents to brand, has ballooned from

    20 per cent of the value of companies in the S&P 500 to 70 per cent today. Leadership now forms a substantial part of those intangible assets and top companies value it accordingly: the Corporate Leadership Council Survey 2006 states 60 per cent of employers see high potential employees as 50 per cent more valuable than the average, and 15 per cent see them as 100 per cent more valuable.

    The War for Leaders

    The result of more motivated workers is demonstrated nowhere more clearly than in the bottom line itself.

    4.074%

    0.544%

    S&P 50020 Best Companies

    Annualized returns of top 20 companies versus S&P 500

    Source: Research Insight, Dec. 2006

  • 7

    Companies are taking longer to fill jobs with suitable candidates already and say they have to make do with below standard employees.

    2007 Hay Group. All rights reserved www.haygroup.com

    Reap the reward of growing your ownWhat is clear is that it is better to develop your own leaders. Recruiting from outside is always a risky strategy, recruits may not be as well aligned with their new corporate culture as internal candidates and may not fi t in. As the Harvard Business Review puts it: top performers who join new companies are unusually slow to adopt fresh approaches to work, primarily because of their past successes, and they are unwilling to fi t easily into organizations

    In addition to the risks posed by trying to integrate an outsider, organizations increasingly fi nd themselves engaged in bidding wars for the best candidates. So not only may your organization pay over the odds for the leadership you acquire, it is highly probable that the cost may not be refl ected in a better bottom line.

    Moreover, once you have hired your stars there is no guarantee they will stay it seems loyalty is no longer what it was. Th e concept of loyalty suff ered a body blow in the hire and fi re culture of the dotcom boom. It left a lasting impression: a 2003 survey by the Society for Human Resource Management suggested that 83 per cent of workers were extremely or somewhat likely to search for a new job when the economy recovered.

    Organizations that identify and invest in their own supply of leaders can look forward to more loyal leaders who are

    a better fi t with their organizational culture and who are more likely to deliver results. However it is not going to happen overnight and the deadline posed by the retiring baby boomer generation is a tight one. Take a company like BASF which is dedicated to a culture of leadership development: it sources 90 per cent of its leaders from within which in itself generates loyalty and reports a success rate of 98 per cent in terms of how happy they are with the quality of those leaders.

    Cultivating a leader takes timeHay Group research shows that it takes around 10 years to develop the skills needed for a senior leadership role. Th at is a very long timeframe if your CEO is one of the 50 per cent set to retire in fi ve years particularly if your organization does not have any formal leadership program in place.

    Companies are taking longer to fi ll jobs with suitable candidates already and say they have to make do with below standard employees. In a survey of some 4000 hiring managers, Washingtons Corporate Executive Board were told that the average quality of candidates had declined by 10 per cent since 2004 and the average time to fi ll a vacancy had increased from 37 days to 51 days. More than one-third of the managers said that they had hired below average candidates just to fi ll a position quickly. If you have cultivated your own leaders you are in a position to identify appropriate candidates for positions before the need arises.

  • The War for Leaders

    The seven practices that make the difference

    2006 best practices 2005 best practices

    1 Having leaders at all levels who focus on creating a work climate that motivates employees to perform at their best.

    1 Having leaders at all levels who focus on creating a work climate that motivates employees to perform at their best.

    2 Ensuring that the company and its senior management make leadership development a top priority.

    2 Ensuring that the company and its senior management make leadership development a top priority.

    3 Providing training and coaching to help intact leadership teams, as well as the individual leaders, work together more effectively.

    3 Providing training and coaching to help intact leadership teams, as well as the individual leaders, work together more effectively.

    4 Rotational job assignments for high potentials.

    4 Providing job-shadowing opportunities for managers in mid-career.

    5 External leadership development programs for mid-level managers.

    5 Ensuring that high potentials receive objective 360-degree assessments and feedback on their leadership ability early on.

    6 Web-based self-study leadership modules for mid-level managers.

    6 Ensuring that mid-level managers get enough time to take part in leadership development activities early in their careers.

    7 Executive MBA programs for mid-level managers.

    So what are the top 20 companies doing to ensure, in Mary Fontaines words, more, better leaders, faster? What are the practices that set them apart from their rivals? What can other companies do to arm themselves in the war for leaders?

  • 9

    2007 Hay Group. All rights reserved www.haygroup.com

    Th e seven key practices identifi ed by this years survey were prevalent right across the FORTUNE 500 companies surveyed....