Invisible Talent Leaks and Outlier Employees

We just got the keys to our new home, so I’m focused on locksmiths, painters, and hardwood sanders. But I wanted to share a few thoughts about the current debate between the past and the future.

The past, in this case, is represented by JP Morgan (“we expect all U.S. employees to move to a regular schedule, in your assigned office location”) and, say, Spotify or even Deloitte.

Beyond Average

In populations with high variance, increasing the sample size can significantly affect the mean. What does this mean? Human height has low variance and follows a normal distribution. The average height of 500 randomly selected humans is nearly identical to the average height of 5,000,000 randomly selected humans. If the tallest person on earth happens to be selected, their impact on the average for the whole sample will be negligible.

The variance of financial net worth is much higher. Including Bill Gates ($100b) in a sample of 500 humans will dramatically impact the average for the whole sample. If 499 people have a net worth of $50,000, adding Gates would push the average to $200m. Even if we sample 100,000 people, adding Gates would make everyone a millionaire on average. Gates is an outlier that skews the whole distribution.

Catching a “Bill Gates” when you sample 500 people is not likely. But the more people you sample, the more likely you are to hit an outlier. And so, the average net worth of 500 randomly selected people might be very different from the net worth of 50,000 randomly selected people.

Outlier Employees

The variance of talent and creative capacity is also high. Researchers are arguing about how to define and measure these things. But we do know that a minority of high performers can make a huge impact on a business or project. As Google’s VP of Engineering once said, one top-notch engineer, can be worth "300 times or more than the average." Services such as Gmail and Google News were originally developed by a single person. An outlier engineer (or designer, or writer, or even a project manager) can make or break a whole project or company.

If you’re hiring from a smaller pool, you’re statistically less likely to hit an outlier. If your business requires everyone to be at the office ~all the time, you’re restricting yourself to a smaller pool.

As Enrico Moretti pointed out, hiring from a smaller pool reduces your chances of matching with an ideal employee that is specialized in the tasks your organization needs — in the same way that dating in a small town reduces your chances of meeting someone who likes exactly the same food, music, and books you like.

But hiring from a smaller pool does not only diminish your chances to find people who are an excellent fit for your company. It also reduces your chances of finding outlier employees, regardless of their specific skills and experience.

That’s a high price to pay for being office-centric. And, for some companies, the price might be worth it. But most companies don’t think about it that way. They don’t, because the price is easy to ignore.

Invisible Leaks

When Morgan Stanley and Goldman Sachs CEOs insist on returning to an office-centric culture, some employees might choose to leave. But these companies will quickly find other employees to take their place. When you pay high salaries, it’s hard not to find someone who’ll take your money. And that someone is likely to be reasonably qualified for the job.

And so, such companies might easily conclude that hiring from a smaller pool does not come at a cost. The jobs are filled, the office is full, all is well.

A sports analogy helps illustrate this dynamic. Kyrie Irving left Boston two years ago. The Celtics were willing to offer him a “max contract” but decided to leave because he didn’t like the location (and some of the colleagues). But since he left, they gave that contract to Kemba Walker.

On paper, it’s easy to convince yourself that Kemba and Kyrie are comparable. They are kind of the same age, have kind of the same scoring and assist averages, etc. Kemba is also a much nicer guy. But advanced metrics — the type that is hard to measure for most other professions — show that Kyrie is a much better player. Kyrie can also recruit other free agents and convince them to play with him, which few other players can do.

And so, the Celtics spent two years paying max money to Kemba Walker, telling themselves the role has been filled. But it was a waste of time. (Kyrie, meanwhile, was mainly injured during the same period… but that’s a different story).

CEOs of office-centric companies can easily delude themselves that their approach to talent does not come at a high cost. They’ll always be someone that kind of fits the job description and is willing to take the money. But that someone is far less likely to be an outlier that can make an outsize impact on the company’s business.

Have a great weekend.

Special thanks to Ben Rollert for helping me understand statistics (if I still got something wrong, that’s not his fault). Check out Ben’s incredible investment management startup.