The Shrinking Talent Pool & What You Should Do About It

Today, an economics lesson.  And the economic issue we’re going to address is what you need to do in a recruiting and retention environment where the talent pool is shrinking and the demand is increasing.  This is a critical issue, so stay with me on this one. 

The solution to the shrinking talent pool is in paying attention to marginal issues.

If you lead a business, you are starting to experience at a practical level what human resource data experts have been talking about for several years now.  Finding the “right” talent is getting harder and harder while marketplace competition for your product or service is simultaneously getting fiercer and fiercer.  Why is that?  Because the marginal increases in capital and communication (the amount of each that is available) today outpace that of the marginal productivity and performance of most employees (the amount of performance that is driven compared to what should be possible given the resources available). So only those who recognize and capitalize on the right end of the marginal workforce (the most productive part) end up winning—and those who don’t, fall behind.  Let’s understand why—and then discuss what you should do about it.

Here is the economics lesson.  Historically, economists have examined three factors to determine how wealth is produced, be it by individuals or businesses: land, labor and capital.  How these elements have been allowed to interact explains the unprecedented explosion of global prosperity our world has experienced over the past couple of centuries.  In his book, The Birth of Plenty, author William J. Bernstein points out: “In order to build a farm, a factory, or a satellite network, all three are needed; how productive each factor is separates the rich man from the bankrupt.”  (“The Birth of Plenty,” McGraw Hill, 2004, by Willian J Bernstein, pgs. 41-44)

Bernstein further points out that if you’re running a business, however, you’re not interested in the productivity of the average piece of land or loan or employee.  You are interested in marginal productivity.  “Marginal” refers to the labor or land or capital that is available to you right now—at this moment.   It doesn’t matter how productive the workforce is at Apple or 3-M if that talent isn’t available to you currently; likewise, with other assets—equipment, technology, communication, etc.  As efficiencies are accelerated in any one category, the other categories are negatively or positively affected.  For example, if you develop technology solutions that make your product or service delivery systems more efficient, but you don’t have an executive or support team that knows what to do with that efficiency, the advances are wasted and the business mires in unfulfilled potential.  Conversely, if you have talent that is capable of “blowing the lid” off your growth projections, but they are working with inefficient assets, those people’s unique abilities are lying dormant. 

GuidePayStrategyCTA (4).pngAgain, if you run a business, you are likely feeling the impact of this marginal economic effect.  Let’s now translate it specifically to the labor market and what is happening with the marginal talent pool.  Here, I’ll quote McKinsey from 2012:

Advanced economies, including those in Europe and North America, face daunting challenges, too. Trends in educational attainment and projected employment needs indicate that employers will require 16 million to 18 million more college-educated workers than will be available in 2020, a gap representing 11 percent of demand (see chart below). 

shrinking talent pool.jpg

Today, interaction work [work requiring extensive human interactions; jobs held by knowledge workers—doctors, engineers, lawyers, managers, sales representatives, teachers, and other skilled professionals who together serve as the engine of the knowledge economy] is at an inflection point as global competition, emerging skill shortages, and changing demographics force companies to use their most highly paid talent more effectively. Employers in advanced economies may soon, for example, be unable to find as many college-educated workers as they require. (“Preparing for a New Era of Work,” McKinsey Quarterly, November 2012, Susan Lund, James Manyika, and Sree Ramaswamy)

So, what is the bottom line of this little economics lesson?  It is this: The marginal labor pool for highly skilled talent is shrinking (and the marginal pool of low-skilled, non-college educated employees is increasing) at a time when marginal capital resources (especially technology) are at their zenith.  The result?  Frustrated chief executives and business owners aren’t experiencing a growth trajectory of their business that aligns with what, on paper, they view as its potential.  They are in the wrong place with one or more of the economic factors needed to produce and sustain wealth creation.  And this is happening because they are likely also in the wrong marginal place when it comes to talent.  As a result, a sustained, negative cycle emerges.  Inadequate talent is unable to leverage available resources, which slows performance.  Inadequate performance stifles the availability of capital to invest in technical resources that will place the company at the right end of the “margins.”  Inadequate technology (and other capital dependent resources) makes the company inefficient—and therefore, uncompetitive.  And so the cycle continues until companies literally vanish.

Therefore, What?

Now that you recognize the issue, what should you do about it?  In my view, you should focus on at least the following four strategic steps.

1. Acknowledge Where You Are.  You can’t advance unless you honestly assess your current condition.  Where do you stand relative to the marginal productivity of the three primary economic factors that will drive your company’s performance: land, labor and capital?  What is the marginal capability of your current talent and how does it compare with the marginal capabilities of your capital assets—technology, marketing capabilities, product development, distribution channels, etc.?  When it comes to talent, how good are you at attracting the best people compared to where you need to be in your recruiting efforts—and relative to your competitors?  In other words, what is your marginal labor force position?

2. Develop a More Advanced Recruiting Strategy. The “marginal” economic issue raised in this article is not going to slacken in the future—particularly as it relates to talent.  It’s going to accelerate.  In other words, you are going to have an increasing need for greater numbers of skilled people and will be searching for them in a shrinking, highly competitive talent pool.  Identifying an effective recruiting strategy, then, is essential.  It is part of defining the performance framework within which your company needs to operate for your growth goals to be met.  That macro construct is made up of three interdependent performance-related frameworks: business, compensation and talent.  An organization’s overall performance is dependent upon a CEO defining then reinforcing a clear link between those three interdependent, strategic elements. 

3. Use Your Current Talent More Effectively.  The exercise of building a performance framework should help you identify the skills you need for your business plan to flourish and then force you to compare that to the talent you have.  As you do so, you should be able to identify your true performers.  Key producers are those who are meeting the success criteria you establish for roles within your business performance framework.  Those individuals are strategic leaders and they need to apply all of their energies to efforts that have strategic impact.  Industries that want to compete need to get very good at this.   They need to ferret off tasks that prevent premier talent from applying their unique abilities to high leverage activities that produce the strategic outcomes the company needs to achieve.  As an example, years ago, law firms began the practice of hiring paralegals, so attorneys could spend less time in research and administration and more time winning cases for clients and bringing in new and more productive business.

4. Develop a More Strategic Value Proposition.  By strategic, I mean a building partnership offering for current strategy leaders and those you need to recruit that is compatible with the times.  Do not assume past practices and approaches will work—particularly in the age and emergence of the millennial workforce.  As a CEO, you need to assume a primary role in identifying how the four areas of a total rewards value proposition will be defined for your company:

  • Compelling Future.  Where is the business headed (vision), how does it plan to get there (business model and strategy) and what is the role of your premier talent in achieving those ends (partnership)?
  • High Performance Work Environment.  How will you ensure strategy leaders are working within their unique abilities and are surrounded by teams that help them to perform the way you need them to?
  • Personal and Professional Development.  What will you put in place, and what resources will you make available, to ensure that your workforce remains the best at what it does and feel compelled to stay with you because of the personal fulfillment they are experiencing?
  • Financial Rewards.  How will you differentiate the financial partnership you enter into with your key people in a way that ensures you are able to recruit, develop and retain talent (strategy leaders) at the most productive end of the labor force “margin?”

A shrinking talent pool is a business reality.  It’s here and its impact is accelerating.  If you run a business, then, you really only have two choices: You either welcome the challenge and go to work on the four areas of focus just described, or, you stick your head in the sand and hope that when you come up for air the business landscape has magically transformed in your favor.  If you choose the latter, good luck.


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