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Subtle factors determine success of forced ranking

With all the recent discussion on Amazon and its workplace culture, I thought it might be time to take a look at these “stack and rank” or “forced ranking” employee review systems. How many companies use them and find them beneficial?

Indeed, many readers were horrified by the revelations in a recent New York Times article that revealed that Amazon uses a controversial employee “stack and rank” system, which ranks all employees against each other. Those scoring below a certain number are eliminated.

The company most known for this type of system was General Electric, which implemented it in the 1980s under its famous former CEO Jack Welch. “They did it for many years,” said Kerry Chou, senior practice leader at WorldatWork, a non-profit organization focusing on such human resources issues as compensation, benefits and performance management. “I would say from a company standpoint that their company was very successful during those years.”

At GE, the “Rank and Yank” system rated workers on a three-step scale, based on performance and goals. The top 15 percent received a 1, the middle 75 percent received a designation of 2 and those in the lowest 10 percent received 3’s and were fired. At the time, Welch argued that the 20/70/10 split was generous because it gave poor performers a chance to improve and hastened their departure if they didn’t.

The system is arbitrary and that is what provides the value, notes Dick Grote, a management consultant in Dallas, Texas, and author of several books on performance management and appraisals.

“Using fixed and arbitrary percentages forces managers to make tough decisions about who’s an A player, who’s not and why not,” Grote writes on his website. “Otherwise, as happens in too many performance appraisal systems, everyone gets rated superior, managers never have to have tough conversations about performance and the organization slowly slouches toward mediocrity.”

However, in recent years, the forced ranking practice has lost its luster among some companies, including Microsoft, which ended the practice in 2013. A 2012 Vanity Fair article on Microsoft associated the ranking practice with poor employee morale and problems with innovation. But other companies continue to use it.

“It’s more popular in the tech sector,” Chou said.

A 2011 study by the Institute for Corporate Productivity found that the number of companies using forced ranking”dropped from 49 percent in 2009 to 14 percent in 2011.” Another study conducted by WorldatWork with Sibson Consulting found that forced ranking was used by only 12 percent of U.S. companies.

WorldatWork doesn’t advise companies not to use forced ranking, Chou said. “But what we do say is that it’s really critical that the leadership understand what it’s trying to solve.

“When someone asks should we do a forced ranking system in our company, my answer is ‘it depends,’” Chou said. “In many, it would be an absolute disaster. For other organizations, it works well.”

There are many market forces affecting a company. “When you have extremely high demand for candidates, you have the luxury to set your standards for work performance very high,” Chou said.

As Grote said, managers in companies with systems like this don’t have the option of glossing over poor performance, Chou said. But on the other hand, when the lowest performers are exited from the company year after year, at some point you begin to cut quality people.

“You can start cutting into some significant levels of bone after a few years,” Chou said.

Then there are the problems created by internal competition.

“A force ranking system more or less tells employees that no matter how hard they work, their manager is forced to put them in the bottom 10 percent group if they do not produce more than their co-workers,” writes Nicole Jue, a blogger on the Institute for Corporate Productivity (i4cp) website. “Not only can this cause employees to feel unmotivated and disengaged, it creates unnecessary internal competition that can be destructive to synergy, creativity and innovation.”

In addition, she writes, employees in the bottom 10 percent in a high-performing department might rank much higher when compared to employees in a different department that has lower overall performance. “Why should that employee be let go when he or she outperforms those in other functions?”

Companies considering these systems should be careful to ask some tough questions, Chou said, such as, how has performance management been handled in the past? What is it you’re not happy with? Why do you want to go to this? Is it because you have a lot of dead weight in the organization?  And are you prepared for the consequences?

Sometimes companies consider systems like this when a new CEO comes in, Chou said. Some managers will be on board implementing a system like this and others won’t. And that raises additional questions. “How many managers and employees are you willing to lose? And how are you going to manage through this?”

The culture of the company and its hiring practices are important components in considering systems like this, he said. “The wider the distribution of performance and ability within the organization, the more challenges you’re going to have.”

At Amazon, some information about employee performance was generated through the use of an open feedback tool that allows employees to send secret feedback to other employees’ bosses. Such tools have pros and cons. They do allow employees the chance to provide feedback when they are uncomfortable speaking out about their colleagues, said Dani Kimlinger, a human resources and organizational psychology leader for MINES and Associates, a behavioral health care firm in Littleton, Colo.

On the other hand, they can be used “as an easy way to go after colleagues. It’s easy to hide behind an anonymous survey and take shots if there is an alternative motive,” she said.

Managers at Work is a monthly column exploring the issues and challenges facing managers. Contact Kathleen Driscoll with questions or comments by phone at (585)249-9295 or by email at kadriscoll@aol.com.

9/4/15 (c) 2015 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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