Some companies seek to enhance their performance by hiring stars from other organizations. This practice has a number of challenges. First, a good deal of performance is context dependent; an individual can thrive in one setting but struggle in another. Second, stars tend to be, in part, beneficiaries of luck. A .300 hitter in baseball, for example, will go through periods of hitting .400-plus or sub-.200. Players who go on the market after a period of above-average results will be evaluated, and paid, based in part on luck. Research shows that stars rarely deliver good value for their new organizations.
(1) This reminds me of the small print at the bottom of ads for mutual funds: Past performance is no guarantee of future performance. Michael’s point is that you shouldn’t pay up for past performance, because it’s a poor predictor of future performance.
(2) But if you can identify the factors which are correlated with future performance, then shouldn’t you hire and pay up for future stars?