Human capital has two essential forms. One is generalized; that is, employees have attributes and qualities that are of value not only to their current employer but to potential employers as well. Employees bring this form of human capital with them when they are hired . They increase their generalized human capital when, for example, they pursue a new degree or professional credential through part-time study outside the workplace. The value of that credential can enhance their standing with their current employer or a new employer. People with generalized skills can move easily from business unit to business unit and from company to company.

The other form of human capital is firm-specific . This type of human capital reflects the value of employees that is unique to a single firm. It grows with tenure and experience in the firm. Its growth is accelerated by in-house training and structured programs of movement through related jobs. Firm-specific human capital is distinguished by its special value to the employing firm in which it is developed; thus, it is less marketable to other organizations.

Different firms require different combinations of firm-specific and generalized human capital to be successful. Neither one is always best or right. Even within a firm, some jobs may require employees with extensive firm-specific knowledge while other jobs may require a high degree of generalized know-how.

One culprit was a bias toward firm-specific human capital over generalized human capital. The company pursued a policy of filling most open positions with internal candidates. That apparently commonsense fill-from-within policy inadvertently resulted in an unhealthy volume of movement within the company. Every manager’s promotion or lateral move created a vacancy, and that vacancy triggered other personnel movements. A few hires from outside would have neutralized the problem substantially, but hiring from outside was counter to the top management’s belief that employees had to grow up inside the company to be fully productive and “understand the business.” The facts showed otherwise . Careful analysis of employee records demonstrated that the performance of outside hires was not substantially lower than that of individuals who had been promoted from within. Indeed, new hires quickly caught up to the performance levels of longtime employees.

The second culprit was related to incentives. The company’s reward system was closely attuned to where one stood on the hierarchy ladder. In fact, the reward system was a classic example of a “ tournament ” career model, in which there is a close calibration between opportunity for advancement and financial rewards. ^[1] Rewards for moving up a level dwarfed pay increases for performance within a level, no matter how excellent . Thus managers had much greater incentives to move up than to stay put and do outstanding work. However, the probability of promotion was quite low, making an individual’s prospects for reaping financial rewards so low that a “ choke point” existed at the lowest leadership levels in the company. Individuals who rose to that level had a very low chance of continuing their rise through the hierarchy.

Faced with that bleak outlook, people looked for ways to improve the odds. They quickly learned that lateral moves would do the trick. Data drawn from internal HR records showed that a lateral move—one that cut across functional areas, for example—was a valuable precursor to a vertical promotion and was far more valuable than a small “in-grade” promotion within one’s current area. Staying in the same position for more than two years also drastically reduced the chances of moving up. Therefore, ambitious managers did whatever they could to bounce around the company. That behavior helped them understand broad dimensions of product development, design, marketing, and the like, but did little to develop deep, specialized expertise in any single area.

Finally, we discovered that the existing talent management advisors were inadvertently acting as agents for individual employees. Review boards composed of HR and line representatives had been set up to spot talented people, assess them vis--vis open positions, and move them along the career ladder. Over time, however, managers looking for lateral moves and promotions took an increasingly directive role in regard to the review boards , virtually asking them to become their agents. Board members often did just that.

In isolation, none of the practices was unreasonable. Moving talented people around makes sense; it creates a cadre of people with broad knowledge of the company and how it works. Hiring from within also has merit; it provides opportunities for capable and hardworking employees and gives them a reason to stick with the company. Financial rewards for upward mobility encourage people to perform well in their current positions. In some places it is the most efficient, powerful way to encourage high performance and build firm-specific capabilities critical to development, production, and marketing cycles. Also, having HR people act as career facilitators increases employee satisfaction and supports the talent development that every growing company needs. However, taken together in their unique production context, those programs were creating a workforce deficient in specialized knowledge, unaccountable for results, and unable to support goals of product quality and rapid time to market.