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Globality: Harold L. Sirkin

Management Dilemma: The Rule of 98/2

I started to write this article some 22 years ago but never got around to finishing it. It involves a management dilemma I call the Rule of 98/2.

The dilemma boils down to this: Should top executives focus workplace policies on identifying and weeding out the 2 percent of employees who are unreliable, can't be trusted, and take joy in spreading their poison among fellow workers? Or should policies focus on the 98 percent of employees who day after day show up on time, do their jobs, work hard, try to do the right thing, and often generate the breakthroughs that advance the company's interests?

I first started thinking about this in the late '80s during a tour of a Japanese automaker's new U.S. plant. Unlike their unionized brethren in Detroit—who in those days typically started queuing up to punch out for the day 30 minutes before quitting time—the employees at the new Japanese plant seemed excited about their jobs and were enthusiastically looking for ways to improve productivity, they told me. Management encouraged the cooperative relationship, a sharp contrast with the "us vs. them" approach then typical in Detroit. The 98/2 ratio came up in a conversation when one of the plant managers told me, in somewhat less-than-perfect English, "The 2 percent find themselves and the 98 percent help us find them." I never forgot those words.

My view is that 98 percent of all people are fundamentally good and when faced with ethical choices will do what's right, while the rest will deliberately choose to do what's improper. From a management perspective, therefore, the choice is often between heavy-handed policies designed to keep the troublemakers at bay—and eventually weed them out—and more lenient policies designed to boost morale and encourage excellence, productivity, and loyalty from the majority.

I vote for the latter. By treating the 98 percent with respect, listening to them, showing them the same loyalty you hope to get in return, you not only create a happier, more productive workplace, you minimize the number of defections to the dark side—the side of the 2 percent.

Problems with Regulations

Unfortunately, many companies focus almost entirely on the bad apples, creating policy directives and layers of bureaucratic oversight, internal red tape, checklists, and rewards and punishments to reduce problems. Such policies often fuel or create problems of their own by destroying the workplace qualities that help make good companies great.

Consider the example of a well-known professional services firm (not my own) that discontinued its employee sabbatical policy several years ago. The decision to discontinue the sabbaticals was made when top management concluded that the policy was being abused by lower-echelon employees, while the firm's most valuable employees rarely took time off. Instead of amending the policy (and perhaps ticking off the small number of employees who no longer would have been eligible), the firm took the path of least resistance and ended all sabbaticals—punishing everyone and alienating some senior people who had been looking forward to recharging their batteries sometime in the future. Several of those employees, for this and other reasons, left the firm over the next several years.

Executives need to understand that there are always unintended consequences when unnecessary rules and restrictions are imposed on the workplace. Such rules and restrictions—however well-intentioned and seemingly necessary at the time—can stifle initiative, discourage excellence, undermine morale, encourage the best and brightest to seek opportunity elsewhere, and, ultimately, eat into profits.

Let me make the case that this is the wrong approach. There is tremendous payback in getting it right, including specific cost-savings.

Employees as Partners

Take the case of a former BCG client, a large manufacturing company that chose to minimize layoffs when it embraced "lean" and found it had excess employees. After streamlining operations, the company's management determined that it needed only 60 percent of the workers and 50 percent of the floor space that it required before going on the diet. The company could have given the redundant workers their pink slips, in effect punishing the very people who had cut the fat from company operations. Instead, management chose not to lay off people and not to fill the vacant space with inventory, but to keep it available for expansion.

The gamble paid off and the company bought a competitor's plant, moved the equipment into the empty space (which had temporarily housed basketball courts to ensure inventory didn't build up), and quickly began production without having to hire more than a handful of employees from the plant it had just bought. The company's existing employees, who had just streamlined their own operations, were ready, willing, and able to help with the consolidation. The net result was nearly twice the output with just a few more people than it had before the streamlining.

By treating employees as partners and adults, rather than mere payroll ID numbers, the company earned their loyalty and cooperation. Instead of trying to throw a monkey wrench into the "leaning" process, the workers embraced it and helped the company do it right—not just once, but a second time.

Peter Drucker said, "So much of what we call management consists in making it difficult for people to work." That shouldn't be our intention. People who are constantly looking over their shoulders and are made to jump through hoops just to do their jobs are not likely to be stellar performers. A company with bored, frustrated, and insecure workers will pay for this in lower employee retention rates, higher recruitment and training costs, and lower productivity.

By encouraging employees to keep the pedal to the metal, work smart, enjoy themselves, and think of their jobs as part of a collaborative process, a company can reduce turnover, lower recruitment and training costs, increase productivity, and spur innovation.

Ways to Rebalance

So how do you shift the balance?

First, by recognizing that most employees are honest, believe in a day's work for a day's pay, and, especially now, are probably thankful just to have jobs. Some are better at what they do than others but generally you've got good people working for you. So treat them that way. Rebalance your thinking; focus on this great asset you've been provided and do what you can to get the most out of them.

Second, by recognizing the absolutely stifling effect of over-regulation. Just as too many government rules and regulations can harm a business, an industry, or even the entire economy, too many self-imposed regulations also can muck up a company's works.

While there is little managers can do to stop the onslaught of government regulation—short of engaging in politics, or hiring costly lawyers and lobbyists to represent their interests—there is much they can do to stop the spread of self-imposed restrictions. Remember, the 2 percent can do only so much harm—but the 98 percent can do so much good. Make it as easy as possible for them to do so by minimizing the control mechanisms that make work dreary.

Finally, act swiftly and decisively when a bad apple needs to be culled. Making it easy for the majority to live up to their potential doesn't mean closing your eyes to the actions of the 2 percent.

Global competition has upped the stakes for everyone. There is no room for slackers and troublemakers. There is also no room for rules and restrictions that tie employees' hands, turn work into drudgery, and increase personnel costs.

Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group (BCG), a professor at Northwestern University’s Kellogg School of Management, and co-author, most recently, of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback (Knowledge@Wharton, November 2012).

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