Will Bell curves eat orgs or orgs eat bell curves

We go through this exercise year after year, especially in large organizations. That is placing all the employees in a bell curve or a normal curve during yearly ratings. Different orgs follow different procedures but more or less the final outcome remains the same.

I am convinced that in the knowledge industry powered by the digital revolution, something is got to give in a few years. Either the bell curve will bring down large organizations OR organizations will learn from what’s happening in the broader economy and take out bell curve driven rating systems. A few companies have already taken the lead.

This is an entrenched system. Organizations have been following this method for decades. If we look at the current digital economy riding high on technology advancements, it provides an unbridled platform for individuals to fully express themselves. The result is that we have incomes (if we take that as a substitute for how much value an individual can add) exhibiting a power law distribution with fat tails. A small percent - the superstars - are able to pull apart from the rest. 

Now conceptually think that the four walls of an organization hold a random sample of individuals from this very society. The core attributes of these individuals (creativity, learning capability, risk taking behaviour, etc, etc) - if given the perfect platform - will doubtless exhibit a power law. But then organizations end up “force-fitting” this set of individuals to a normal curve.

What is the fundamental difference between a normal curve and a power law curve? If you can actually do a small simulation of repeatedly drawing 500 random observations from a normal distribution and a power law distribution, you will understand. The big difference is normal distribution blocks out large outliers (remember stats 101? Less than 1% lie 3 sigma away from the mean). With power law distributions, you will see it is quite common to see wild outliers - several thousand times the mean. And because of outliers the mean also is several orders above the median. The concept of a ‘typical’ or ‘average’ employee is not there in a power law distribution.

My hypothesis is simple. Since normal curves are unable to accommodate these large outliers and force everyone to group around the ‘average’, the ‘superstars’ - who we actually want to retain - get crowded out. But good for the overall economy as more Jan Koums get out there and do their stuff to move us forward. I do not know which one will happen first – will the economics of large organizations crumble over time on the face of the disruptive digital economy OR they would learn to replicate the real economics unfolding outside their four walls. Have to wait and watch and be ready....