The Coming Collapse of Average Managers and Employees

"Whip your thoroughbreds." That's the phrase I kept hearing from Jack Welch-era high potential managers hurtling up GE's global hierarchies. Brutally simple and simply brutal, this Welchian aphorism disproportionately drove top management behavior. The company found it got far greater value working its best people harder than by pushing its multitudes of "better than average" managers to work smarter.

The numbers were compelling. Even marginal returns from GE's elite outperformed major enhancements from its mediocrities. "B" players proved poorer human capital investments than "A"s.

So "thoroughbred whipping" deserves a closer look in light of widely-publicized recent research entitled The Value of Bosses. The National Bureau of Economic Research Working Paper empirically argued (unsurprisingly) that bosses matter. Better bosses generate better results. Using a variety of accepted econometric/statistical techniques, the study found that the most significant impact bosses had didn't come from their motivational skills, but from teaching workers how to be more productive, i.e. capability building. That's important.

But the finding that surprised one observer most was "counterintuitively, that it pays to assign the best workers to the best bosses because that strategy results in the largest productivity gains."

Doesn't sound counterintuitive to me. In fact, that seems completely consistent with the elite — and elitist — human capital belief that consistent productivity and value creation comes from how well organizations manage their best people, not from better managing mediocrity. Research like this strongly suggests that mean, median and modal performers are unlikely to be key sources — or resources — for significant returns on organizational investment.

In other words, average performers — be they bosses or workers — become relatively less valuable over time. More crassly, mediocre people make mediocre investments. The average is the enemy.

If this sounds suspiciously like Pareto's 80/20 Principle — my apologies Henry Paulson! — that's exactly my intent. The useful oversimplification that 80% of value creation/productivity boosts come from 20% of the workforce suggests certain ineluctable mathematical outcomes. Let's be flexible and forgiving and assert that roughly 75% of enterprise value/productivity comes from 25% of the workforce — thus dropping the multiplier from 4:1 to 3:1.

Getting 10% improvement from your top 25% means you've increased organizational value creation by 7.5%. Not bad. Your remaining 75% would have to boost their collective productivity by 30% — 3X the elite groups's rate — to match that 7.5% net increase.

What's the better and more rational bet? That top management can get a 10% spike from their top people? Or that they can get the demonstrably less talented, less capable, less productive three-quarters of their enterprise to dramatically increase their value outputs by almost a third? Which group would you invest in? I know where I'd put my money. Jack Welch was no fool.

Empirical realities are starker. What's more common, of course, is that a firm's top quintile or quartile will likely generate 20% to 50% or more potential gains while the rest of the organization struggles to break double digit growth. Intra-enterprise disparities in value creation haunt virtually every growth-oriented organization I know. Alpha hackers like Mark Zuckerberg, Mark Andreessen and Larry Page/Sergey Brin built their organizations around them.

Organizations with more balanced distributions of value/productivity creation — say, 40% of its people generate 60% of the value — confront less conflicted and schismatic human capital investment challenges. They may still want the best possible people but the inherent economic interdependencies are better appreciated and understood.

There's arguably never been a worse time to be a mediocre, average or typical employee. For most firms today, mediocrity is a cost to be managed and a burden to be borne, not a potential to cultivate or a resource worthy of serious investment. Indeed, if an app, web service or an outsourcer can deliver 80% of typical or average performance at 35% to 60% of the cost, then why pay for average employees? These days, no organization can afford to pay a premium for mediocrity.

The biggest challenge I see for tomorrow's organizations isn't how to best to whip their thoroughbreds; it's whether marginal investments in the mediocre can cost-effectively move a second-quartile performer into the first quintile. Will that be the "real" future value of bosses? Or will "average" further devolve and decay into value-added irrelevance?

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