20-70-10

Excerpts from Winning, by Jack & Suzy Welch

If there is one of my values that really pushes buttons, it is differentiation. Some people love the idea; they swear by it, run their companies with it, and will tell you it is at the very root of their success. Other people hate it. They call it mean, harsh, impractical, demotivating, political, unfair - or all of the above. Obviously, I am a huge fan of differentiation. I have seen it transform companies from mediocre to outstanding, and it is as morally sound as a management system can be. It works.

• Companies win when their managers make a clear and meaningful distinction between top- and bottom-performing businesses and people, when they cultivate the strong and cull the weak. Companies suffer when every business and person is treated equally and bets are sprinkled all around like rain on the ocean.
• Differentiation defined: Differentiation is a way to manage people and businesses. It holds that a company has two parts, software and hardware. Software is simple - it’s your people – and that’s the more controversial of the two. It’s a process that requires managers to assess their employees and separate them into three categories in terms of performance: top 20 percent, middle 70, and bottom 10. Then and this is key - it requires managers to act on that distinction. I emphasize the word “act” because all managers naturally differentiate - in their heads. But very few make it real. 
• When people differentiation is real, the top 20 percent of employees are showered with bonuses, stock options, praise, love, training, and a variety of rewards to their pocketbooks and souls. They are the best and are treated that way.
• The middle 70 percent are managed differently. They are the majority of your employees. And that’s the major challenge, and risk, in 20-70-10 - keeping the middle 70 engaged and motivated. That’s why so much of managing the middle 70 is about training, positive feedback, and thoughtful goal setting. If individuals in this group have particular promise, they should be moved around among businesses and functions to increase their experience and knowledge and to test their leadership skills. 
• To be clear, managing the middle 70 is not about keeping people out of the bottom 10. It is not about saving poor performers. That would be a bad investment decision. Rather, differentiation is about managers looking at the middle 70, identifying people with potential to move up, and cultivating them. But everyone in the middle 70 needs to be motivated and made to feel as if they truly belong. You do not want to lose the vast majority of your middle 70 - you want to improve them.
• As for the bottom 10 percent in differentiation, there is no sugarcoating this - they have to go. That’s more easily said than done; it’s awful to fire people - I even hate that word. But if you have a candid organization with clear performance expectations and a performance evaluation process, then people in the bottom 10 percent generally know who they are. When you tell them, they usually leave before you ask them to. No one wants to be in an organization where they aren’t wanted. One of the best things about differentiation is that people in the bottom 10 percent of organizations very often go on to successful careers at companies and in pursuits where they truly belong and where they can excel.