THE BLOG

The Madness of Forced Ranking

03/02/2014 12:55 GMT | Updated 02/04/2014 10:59 BST

Summing the parts

They had come together to break a record - and they almost achieved it. The John O'Groats to Land's End non-stop tandem challenge was something they were doing in their own time - voluntarily, they had sacrificed holiday, incurred some costs, and along the way suffered sleep deprivation. Every single person involved had given it their all and their discretionary effort was simply huge. Imagine then turning round to this highly motivated group of people and telling them they were about to be ranked in terms of their contribution, and that some would be ranked as better than others, and ultimately someone would be defined as the worst performer. It is nonsense and quite frankly, insulting. The team effort was more than the sum of the parts and arbitrarily forcing an unnecessary distinction between people in this situation is unhelpful. But this is what many businesses force their managers to do to their people.

Crossed arms and folded legs

I can still see it now - the moment when everyone in the room sat back, crossed their arms and the questions and criticisms would start - "But what if all my team are above average?" or "what if no-one is performing badly?" What followed was, in hindsight, an unconvincing explanation about the calibration process involving yet more meetings and discussions to iron out inconsistencies. What people were objecting to was the forced-ranking of their colleagues on a 5 point rating scale where some would have to be defined as low-performing and others high-performing. It was a divisive, unpleasant, unproductive process that seemed to alienate those ranked at the bottom end and those who had to do the ranking, and as Microsoft have found out, rich in unintended consequences.

Unintended consequences

Microsoft has just ditched its long-standing forced-ranking or stack-ranking performance management system and replaced it with more frequent qualitative evaluations of employees. This abrupt change of direction was announced with immediate effect and it signals a major cultural shift within Microsoft. So why did this happen and what are the implications?

Forced-ranking of employees means that all the employees within an organisation are compared or ranked against one another in order of performance. Then, using the statistical bell-curve specific numbers of employees are placed in categories ranging from: exceeds all expectations; exceeds expectations; meets expectations; partly meets expectations; fails to meet expectations. This system was used by CEO Jack Welsh at GE and was more commonly known as 'rank and yank' in which the bottom ten percent each year were encouraged to leave and this was considered to galvanise the other employees into working harder.

Although Microsoft's departure from forced-ranking was sudden it was not entirely unforeseen. On the surface, Microsoft's earnings remain healthy but some industry observers consider Microsoft to have had a decade of stultification and little creativity resulting in it being overtaken by numerous more innovative companies including Apple and Google. One of the main causes of this failure to build on previous market and technological successes has been attributed to its forced-ranking system. A former software developer explained that no matter how hard people worked, in a team of 10 people, 2 would receive a great review, 7 a mediocre one, and 1 get a terrible review. The result was that, "It leads to employees focusing on competing with each other rather than competing with other companies."

The stack system also resulted in capricious rankings and power struggles among managers. It reduced morale and left the majority of hard-working employees ranked 'meets expectations' feeling like they failed because they were in the third class. This dissatisfaction lead to a review and feedback from 10,000 employees and interviews with over 50 executives which resulted in the performance management system being overhauled.

The stack system also undermines the recruitment, selection and ongoing development systems within an organisation. If people are carefully chosen because of their knowledge, skills and motivation then the normal bell-curve should be skewed to create a bulge to accommodate the increased number of high class of employees. If employees are considered to be underperforming might this indicate an inability among line managers to support and develop their subordinates?

Of course, it is not practical to apply a flat level of compensation to everyone in the organisation; even communist regimes recognised the shortcomings of that approach. So, there needs to be some form of applied remunerative discrimination, but the challenge is how to do so fairly. No system can accurately appraise all employees and there will continue to be those organisations that feel stack ranking appears to work for them. Marissa Mayer CEO of Yahoo introduced the system a year or so ago and the company recently let 600 staff go after they received two quarters of low reviews. The company's stock is up but whether it is due to the performance management system or other factors remains to be seen.

The fundamental flaw

There remains for us however, a fundamental flaw in the whole notion of performance appraisal, and that is the sheer complexity of variables that impact upon how a person behaves and performs in business. What we know from the study of context is that it is not so much the individual, as the situation he or she finds themselves in, that determines how they will behave. Much of that situation is not within their control. Rewarding or punishing someone, implying they have a level of control far greater than exists in reality is, quite frankly, absurd. The literature in favour of the performance management systems is underwhelming - rather than evaluate one system over another, we should be asking whether any system really helps of whether it is another management example of the 'emperors new clothes'.

John P Wilson and Dominic Irvine 23rd January 2014 All rights asserted.