You are probably familiar with the 80/20 rule, or Pareto's Principle. I've written about what I call Altuchers Rule or 80/20/20 (20% of your 20% are your core clients). Now let's look at Price's Law, and how it might be useful in thinking about small business. The law states half of the total contribution is made by the square root of the total number of participants. If the language sounds vague, it's because it was originally about contributions to academic papers. It has been applied to the workplace somewhat successfully though and if you've worked in enough places, it certainly rings true. It's horrifying, but not surprising.
I've had small business colleagues complain about the productivity of their staff, with complaints getting more numerous as their business grows. In small business, the owner is usually a workhorse. Employees are reluctantly hired to carry some of the load. We want to do more and employees allow us do that, sorta kinda. As you grow your staff, you look around, and realize the same people as before are doing most of the work, or perhaps one more of the several you recently hired. Maybe if we hire another couple people, we can break through this? Price's Law says good luck.
To give you an example, if you have a staff of six, under Price's Law, two are workhorses, and four are contributing a minimal amount of work. You tried to hire good workers, but it didn't work out like you expected. Twelve employees and eight are just getting by. Ten thousand? Only 100 performers. We grow into increasing inefficiency. This is not new, but it's shocking if you don't have broad work experience. It's also why very experienced owners are reluctant to grow. They know the inevitable outcome. I can tell you stories of dead wood, both people I worked with and the pain of realizing that I was the deceased wood.
Many successful owners are used to being in the competent category, and probably never had time to look around to see the under performers. Under performers are still contributing, but there's a tendency for them to naturally obfuscate the differences between them and the performers. People are taught that if they can't stay busy, they should at least look busy. "If you can lean, you can clean." Incompetent managers are no different, so there's a lot of smoke in organizations, with new projects and initiatives, but not a lot of fire. Managers are not immune to Price's Law.
So what can we do about this as small business owners?
First, let's be clear that the so called incompetent still contribute, just no more than is absolutely necessary. There's even a grievance movement afoot to work in this fashion. I would also argue, this is the nature of most people. Most people are working out of necessity, not passion. If you're that individual, find out what you're passionate about and seek out that feeling in a field that works for you.
When it comes to hiring, you can and should attempt to hire around the incompetent, looking for top performers. We don't owe anyone a job and there is no assumption business is some sort of employment socialist utopia. We don't want these under performers, who need to go find their passion. We just end up with them.
Of course, if the person doing the hiring is incompetent, you'll get more incompetent workers. There is some research indicating that low performers can't even identify top performers and end up hiring people at or below their competency. The competent are so different, that the incompetent not only can't identify them, but are turned off by them. It's important to allow the performers to hire and insist they look for the appropriate signs of competency. As if the performers didn't have enough to do already! In my experience, you're likely to be only 50% successful with your hiring, but that's still better than Price!
Second, most people just do what they're told at a job. They're afraid. They're unsure of what needs to be done. Some are waiting for you to instill competence into them with training and direction. You can bend the competency curve with some attention to their needs. Unfortunately, I think most of us are crappy managers, also known as being incompetent.
Most of us started a business because of passion for something, and that something probably wasn't managing people. When it comes to training and experience in America, a good manager or good management training is damn rare. I've had such poor managers in my work experience, that it often came down to meshing with personalities, rather than discovering good leadership. I certainly don't claim to be a great leader myself.
If you have an employee who is not naturally competent, it's awfully hard to turn them. It's what we look for in individuals we want to groom to become managers. Do they identify problems? Do they take the initiative to solve them? Can they perform over time or do they lose interest? Can they work independently or do you constantly need to tell them what to do next?
Third, assuming you are stuck with the square root of your employees being competent, reward competency. Don't lose those people. Most large organizations can't identify them, because, as we now know, they're incompetent (also don't forget Dunning-Kruger). With wages going up dramatically, it's hard to compensate the competent more, when the pool of resources is tapped.
There is some resistance to increased compensation for performers. I have bumped up against push back against increased compensation for performers, as there's a socialist element in the culture that equates uneven compensation, for whatever reason, as unfair. I've had employees compare paychecks and question why one person was paid a dollar more an hour than another. This is considered normal now. They expect wage transparency, and uneven compensation is an uncomfortable discussion.
So there you have it. Really this is just a name to describe what you already knew. If you disagree with this, if your experience differs, you are probably a great manager. You can identify and hire talented individuals with skills and ambition like your own. You can encourage, train, and compensate your staff to a high level of performance. You are the function of the square root of the rest of us. I look forward to your book.
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