Back in the late 19th century, Italian economist Vilfredo Pareto observed that 80 percent of the land was owned by 20 percent of the people. In the 1940s management consultant Joseph Juran argued that the 80-20 rule applied to management in general, concluding that there were the "vital few and the trivial many." That seemed a bit harsh, so he later revised it to the "vital few and the useful many."
The principle seems to be having a revival these days. Management consultants insist that a 20 percent vital few really matter in companies, a large middle just do their jobs, and another 10 percent or 20 percent should be encouraged to leave or be fired. Recent data from Mercer Consulting shows that employers are now focusing most of their bonuses on just a small number of people, while about 30 percent of companies that had broad-based equity plans have dropped them to focus on "the people who really matter." So the new corporate mantra, I suppose, is that "20 percent of our people are our most important asset."
This rule never made much sense to me. After all, if we focus rewards on the 20 percent, the other 80 percent would be most unhappy. Of course, that might demotivate them enough to make the 80-20 rule actually work. That is especially true because surveys consistently show that about 70 percent of employees believe they are in the top 10 percent of performers (admit it, you think you are, right?).
It is easy to see why people are attracted to the 80-20 rule for management. First, everyone who writes and reads about it, I'd wager, believes they are in the 20 percent. Second, it justifies maximizing the rewards that go to the top. Third, if you treat people as if they don't matter that much, you may well end up with an organization where they don't. So your brilliance in following the 80-20 rules is self-fulfilling. In fact, why not take the 80-20 rule a little further? If 80 percent of the results come from 20 percent of the people, then shouldn't 80 percent of the results from the top 20 percent of the company come from 4 percent? And 80 percent of what the 4 percent produce from 0.8 percent? After all, this is a rule.
Curious about this, I spent an hour Googling for research on human resources management that proves the 80-20 rule. There may be something out there, but I couldn't find it. Of the hundreds of links I did find, all but a handful just accepted the rule as some kind of unrepealable law of nature.
The 80-20 rule is corrosive. It deters management from finding ways to get as many people as possible in an organization to contribute ideas, information, and effort that help the company move forward. It creates too much competition between people for scarce rewards, thus discouraging teamwork. And while it is certainly true that people make unequal contributions to organizational success, to assume this follows an arbitrary division of any kind is lazy and ineffective. So I am herewith creating the Rosen rule. If in your organization 80 percent of the results come from 20 percent of the people, your organization is very badly mismanaged.
That's how Doug Smith of Lumber Traders, an ESOP-owned company in Port Angeles, Washington, sees it. He told us that "the establishment of the 80-20 rule is a benchmark of bad management. Our society always looks to the dark side, self-interest, and fear. No wonder so many people are only looking out for themselves. We take a different approach. Yes, we do have some percentage of 'vital few,' and we do have pockets of perfection, but our overriding goal is to identify these resources and to propagate them." Smith's concept is that these star performers should be focusing their efforts not on distinguishing themselves from everyone else, but working to bring the other 80 percent up to their level.
Great business leaders are humble. That humility is what makes it possible for people around them to be confident they can express ideas and disagree. Rather than trying to rely on the ideas and energy of just a small percentage of their work force, they seek to engage everyone and put them all in the top 20 percent.