Wow! I’ve taught basic stats several times and studied graduate level economics. I have to admit I had never heard of a Paretian distribution – the power law distribution -- until I read Jacque Vilet’s recent post. As I think about her argument, I’m sure she’s correct. But from my perspective she is also wrong.
The normal distribution is irrelevant to the management of people. Its use dates to World War I and the selection of men into the US Army. When large numbers of people are selected (or drafted) so they constitute a random sample, the distribution of their IQs and other innate abilities should conform to a bell shaped curve.
However, no organization, including today the US Army, selects people randomly. And needless to say, innate abilities are not the basis for selection.
Latching on to the power law distribution is not ‘the’ answer to the evaluation and management of people. To illustrate, pro football teams rely on a highly selective draft (hiring) process and on rewarding performance. They also have to live with a salary cap similar to a company’s concern with managing labor costs.
It’s arguable but Denver’s Peyton Manning is probably the best quarterback in pro football today. As such his pay is at or above that of other quarterbacks. Wes Welker is a favorite target for Manning’s passes and one of the best wide receivers. On defense Champ Bailey is one of the best cornerbacks. Each would be at the extreme, outlier tail of the curve. Each expects, probably their agents demand, they be paid accordingly. But the Broncos have to balance their salary demands with all the other players to keep the total under the cap.
I certainly was not involved in the discussions but my bet is the Broncos evaluated and paid Welker relative to other wide receivers and Champ Bailey relative to other cornerbacks. They did not compare Manning with Welker or Bailey. At no time in years of following pro football, or any other sport, have I seen a forced distribution that tries to compare players in different positions.
In the real world, it makes no sense to compare carpenters with painters – each has a unique set of skills and separate labor markets – or for that matter it makes no sense to compare accountants with HR specialists. In the same way I would not want to use the same performance criteria to assess a journeyman carpenter and an apprentice. The performance expectations would be very different.
As I recall from the textbooks, the goals of performance management include: (1) developing job-specific performance plans and identifying the criteria relevant to assessing an employee’s performance, (2) providing job relevant feedback, (3) evaluating at year end how well each individual performed relative to their performance plan, and (4) rewarding them relative to market pay levels for their job family.
I know Jack Welch has used the argument about children in school all being graded with the same system. He is of course correct that letter grades are commonly used for every student but he ignores the obvious fact that they are not all taking the same tests. An A in spelling has the same basic meaning as an A in physics but they are obviously very different subjects. When I was in school I hated physics but was reasonably good at spelling. I wanted to be recognized for my achievements – I was proud to be in the regional spelling bee. That had nothing to do with my mediocre performance in physics.
Jacque is correct -- identifying the star performers is important. And it’s definitely important to recognize and reward their contributions for the same reason Manning gets all the accolades.
But it is also important –- possibly more important -- to encourage every employee to develop their skills and progress up their career ladders. The Broncos and every organization need solid performers at every position. That’s the goal of performance management. It’s different than recognizing the outliers on the curve. From my perspective, the potential payoff is far greater than focusing on the few superstars.
Howard Risher is a private consultant who focuses on pay and performance. His career extends over 40 years and includes years managing consulting practices for two national firms. He is the editor of the journal Compensation and Benefits Review. He also has an MBA and Ph.D from the Wharton School of the University of Pennsylvania. Contact him at email@example.com.
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