August 10, 2012

Fewer firms ranking workers like Microsoft does

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Lance Jaglarski (right), the general manager of the Palm restaurant in Atlanta, chats with wait staff. Jaglarski says his employees are evaluated, but not ranked because the staff needs to work together. (Brant Sanderlin / Atlanta Journal-Constitution)

By Michael E. Kanell / The Atlanta Journal-Constitution
Many American companies that use a ranking employee-evaluation system have lately been turning away from it.

Known as “stacked ranking” or “forced ranking,” the process made famous by GE is really just a version of what teachers call grading on the curve: a few people at the top, a few at the bottom and the rest clumped in the middle.

The practice leaped into the spotlight -- at least for people who study how companies perform -- when Vanity Fair’s August issue published a profile of technology icon Microsoft. The company’s malaise, the author argued, was partly pegged to its evaluation system.

Whether a company makes screws or salads, whether it’s a hole-in-the-wall or boasts a hundred global offices, it wants to know which employees are doing well and which are doing badly. A good evaluation system encourages creativity, spurs productivity and lifts morale.

So why do many American companies use a system that experts say is often stifling, demoralizing and counterproductive? And why are they now shying away from it? Generally, rewards and penalties follow the numerical rankings. But not necessarily success.

Stacked ranking was popularized by GE during the much-touted tenure of Jack Welch and was adopted by thousands of companies. Yet in 2004, just a few years after Welch retired, GE itself stopping using it.

When Welch took the helm in the early 1980s, GE was struggling. His system greased the skids for job cuts. Looking back, the company gives it credit for making employees more conscious of high performance.

But that was then, says Janice Semper, GE’s manager of executive development. “It was appropriate for the time, but it’s a different time.”

GE still grades employees on their performance, but there is no mandate to give a certain percentage either high grades or low marks, Semper says. “We found that at times, we were unfairly putting people there. We don’t get to that rating now by comparing people to one another.”

According to surveys of “high-performing” companies by the Institute for Corporate Productivity, the percentage using forced ranking has plummeted from 49 percent to 14 percent in just two years.

But why? What’s wrong with picking out top performers and targeting poor ones? A lot, say many experts and human resource professionals.

First and foremost, say critics, ranking undermines teamwork. Why help someone if that might vault him or her above you? Why ask for assistance if it hurts your standing? In many workplaces, teamwork is essential.

For instance, at the Palm restaurant in Atlanta, the 60-person staff needs to work together, and employees are expected to understand that, says Lance Jaglarski, the general manager.

“If you are not willing to give help or ask for help, you are pulling everybody down,” he says. “That doesn’t work for us.”

Workers are evaluated, but not ranked, Jaglarski says: “We just look at it completely different.”

A forced ranking system can be unfair. What if all team members are competent? What if the difference between the best and the worst is marginal? What if different managers judge differently or -- even worse -- play favorites? And what about people who have different strengths?

“You need a balance of skills and motivations,” says Juergen Meyer, Atlanta-based principal in UHY Advisors, tax and business consultants. “You need natural leaders of a team, but you also need people doing the work.”

Different strengths are also hard to rank, Meyer says: “It’s comparing apples and oranges.”

What's more, forced ranking can be expensive. Companies could be cutting people they've already spent a lot of money hiring and training, says Deb Keary, vice president of human resources for the Society of Human Resources Management, an association that represents about 258,000 HR professionals.

"If you are trimming your workforce down or replacing people, you've got a big expense there," Keary said.

At Society of Human Resources Management itself, the 400 employees are evaluated but not compared, she says. "Everyone has different contributions that are unique to them. We rank them as to how well they are doing -- not compared to other people." Forced ranking is "the most draconian method" of evaluating employees, she says.

In some ways, the previous embracing of forced ranking reflected the struggle of companies that wanted something effective -- and straightforward. They reached for an answer that worked for someone else, says William Bogner, professor at Georgia State University's Robinson School of Business.

Yet every company is different and a solution needs to match the situation, he says.

"There is a desire to have a single, one-size-fits-all solution and there is never one size that fits all," he says. "There is no short-cut to good management of people."

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