003-Concepts of Potential Performance Curve (PPC) Part 1

I copied some materials from my book, “Working in a Battlefield” to let you know what the Potential Performance Curve is. Once you understand the concept, we can discuss more real-world phenomena with this theory.

Equal Wage

There is a new fast-food restaurant that just opened on the corner of the street with five of the same job opportunities available, for example. After a period of job interviews, the boss decides to hire these five people: John, David, Mary, Peter, and Sue. Since they all are newly hired employees, the boss is not familiar with their work performance. They will all receive the same wage of $5 per hour. As we know, different people have different talents. Someone can do a job well, but others cannot. How I assume these five employees’ potential wages based on performance on the same job are as follows:

What is potential performance? It is the maximum return from a person. Here it implies that the person cannot produce any more than the maximum return when other factors remain unchanged.

Now I rank these five employees by their potential performance as follows:

Fig 1.1

If all employees are doing their best without considering any selfishness, the total return per hour will be $40 ($10+$9+$8+$7+$6), and the total cost per hour for hiring employees will be $25 ($5X5). The total gain per hour for hiring these five employees will be $15 ($40-$25). Here we assume there is no fixed expense such as rent. In this case, all employees can have a stable wage, of $5 per hour, and the boss can have a profit of $15 per hour. See Fig 1.1.

It is not necessary to rank the employees. However, it will look better and make it easier to compare the potential performance of each employee, indeed. You will see that the ranked chart will be very useful in later sections of this book. If we don’t rank the employees, the chart may look like Figure 1.2.

The wage line is always below the potential performance curve (PPC) since companies will lose money if they hire a person whose wage is higher than the return that the person can provide. Just look at the fast-food restaurant as an example. If the employees’ wages rise to $7 per hour, the situation is shown in Figure 1.3.

The wage for Sue is $7 per hour, but the maximum return she can provide for her restaurant is only $6 per hour. Since the restaurant is losing money by hiring her, the restaurant has no reason to keep her. The restaurant may fire Sue and hire another person who has a high potential performance.

Change in Potential Performance

Can the potential performance curve change? Yes. Even though the potential performance is the maximum return for employees, the potential performance can still be changed by other factors, such as technology improvement.

Increase in Potential Performance

1. Technology:

Time flies and technology advances from time to time. Technology, like computers, improves the productivity of many industries. It increases the potential performance of each employee. The potential performance curve will shift upward from PPC1 to PPC2 as follows in Figure 1.4.

1. Work Experience:

The longer history you have worked on the same job, the better quality and return you can provide as a result. That is not difficult to understand. As a new employee has just started his position, he needs time to understand what his job is. Even if he is a certified public accountant who should know the unified format for doing any accounting job, he will still need to learn how to file documents and search old files in the company since different companies have their one styles.

In the fast-food restaurant, John may not flip eggs very smoothly or quickly at the beginning. After he has practiced long enough, he will flip eggs perfectly every time without breaking even one egg. That is what we call work experience. Long-term work experience will result in high PPC. See Figure 1.4 John’s PPC will shift upward from PPC1 to PPC2.

Decrease in Potential Performance

It sounds impossible but when technology goes backward, the overall potential performance of all employees decreases. The PPC will shift the whole curve downward from PPC1 to PPC2 as seen in figure 1.5 below.

Indeed this did occur, as I remember, before the year 2000. Some people may remember the Y2K Bug. It was a software error in which the date in our computer systems would have been in error after the last day of 1999. Therefore, many companies made hard copies of backup documents. Even banks spent a lot of resources on making hard copies of all their accounts, and they spend a lot of manpower on solving the software error.

Other than technology moving backward, a natural disaster is also one of the factors that decrease PPC. Earthquakes, for example, may damage buildings, facilities, and machines. Employees may need to work without any help from these tools.

Or, for some reason, some extra procedure may decrease the PPC, too. Just like in airports where there have been a lot of X-ray machines set up at all the international terminals to check each traveler for any dangerous items in their luggage. This procedure may decrease the PPCs of all employees working in airports. Even the PPC of all the employees from any company who need to travel may also decrease because they will need more time to do business aboard.