When economic conditions are difficult, the performance levels of employees
can come under the spotlight. So, is grading employees via forced ranking a
valuable management tool? Caroline Horn reports
As the downturn in the American economy starts to bite, US corporations are
taking a longer and harder look at employee performance levels. When times are
good, staff with lack lustre performances are offered training and motivational
programmes. But when conditions are tough, poor performers might find
themselves at the exit door rather than the training room.
One of the measures growing in favour in the US to reward those doing well –
and to weed out poor performers – is forced or graded ranking, whereby a
company assesses employees against various criteria to gauge their performance.
The workforce is then ranked using a bell chart – into the top 20 per cent, the
middle 70 per cent, and bottom 10 per cent of performers, for example.
Kevin Rubens, senior vice-president and European region head of Aon
Management Consulting, says, "I think what happens when the economy gets
tight is that people tend to get sharper on performance measures. They want a
system that will differentiate performance, but which has some objectivity and
internal justice or equity." Those who do well in graded ranking can be
rewarded handsomely. But those unfortunates who find themselves in the bottom
10 per cent could be threatened with losing their job unless their performance improves
– hence employees’ label for forced grading, "rank and yank". Cisco
Systems, for example, says it will use forced grading as one method of
identifying workers for redundancy.
However, forced ranking can have a valuable place in a particular type of
corporate culture, says Rubens. "Companies that have adopted it tend to
have rapid growth levels, large numbers of applicants, and a reputation for
offering high rewards and a lot of opportunity for people to progress. In that
environment, it works well – companies can set lots of goals and people work
hard to achieve them. In a tough, goal-oriented culture where you have to
increase performance overall, forced ranking can work."
At General Electric, a forced ranking system differentiates the top 20 per
cent of performers from the middle ranks and bottom 10 per cent of performers,
and the company makes no bones about removing the bottom layer.
General Electric chief executive John F. Welch recently told the company’s
shareholders, "A company that bets its future on its people must remove
that lower 10 per cent, and keep removing it every year, always raising the bar
of performance and increasing the quality of its leadership."
Microsoft is also a long-term user of forced grading as one of its measures
to improve overall performance, and other adopters include the Ford Motor
Company and Hewlett-Packard. Microsoft says its approach to forced ranking is
tightly linked to its company culture. Steve Harvey, director of people, profit
and loyalty at Microsoft in the UK, says, "I have worked in many companies
and my criticism would be that there has not been enough focus on the stars and
on rewarding outstanding performance. One of the reasons we have kept the
company where it is has been by rewarding people for their personal
performance. Their performance is linked to UK objectives and worldwide
objectives and our reward and review process ensures our stars are
recognised."
Microsoft grades all its staff with points, ranging from 2.5 to 5, and these
are put against a bell curve for broader comparison against other employees.
"Those who get 5 points are the superstars, while those who are at 2.5
need to show improvement," says Harvey. The company average is about 3.6.
"Those at 3.5 are doing a great Microsoft job, they are hitting their
objectives," says Harvey. Those who aren’t reaching their objectives have
three months to improve.
Harvey emphasises the thoroughness of Microsoft’s recruitment process.
"If someone then arrives at 2.5 points, it is hard for us – but perhaps
they are just not a Microsoft type of person," he says. "It doesn’t
happen very often." Officially, Microsoft does not insist that a certain
percentage of its staff is put in the "at danger" category. About 20
per cent of the workforce is still below 3.5 points, however. "At 3, they
might have just joined the company and are not up to speed yet," says
Harvey, before adding, "But they don’t have long to come up to
speed."
The main issue for companies adopting forced ranking is the long-term result
they are trying to achieve, says Rubens. "The issues are really related to
a company’s thinking through the long-term consequences of a system like that
and the culture they are trying to build – is forced grading enabling for that
cultureor not?"
Microsoft points to staff turnover, in an industry where recruitment is
notoriously difficult, as a measure of its success. Harvey says, "I am
responsible for technical staff, and among them, attrition rates are 3 per cent
compared to an industry average of 19 per cent." The company average is 7
per cent.
Forced grading can be a useful tool for managers, helping them to rate
employees objectively and to make clear distinctions among them, since managers
are forced to grade according to performance. But for it to work forced ranking
must be used objectively. Rubens says, "There’s nothing wrong with being
force ranked when it is related to performance, but what matters is the way
managers use the information and whether it is done in a fair and consistent
way."
Microsoft doesn’t just rank its staff on how well they have met their
objectives, it also considers whether they have lived up to the Microsoft values
– a much harder criterion to evaluate.
"How you do your job and how well you interact with people is one-third
of your review," says Harvey. "Two-thirds is business results."
Duncan Brown, principal at HR consultancy Towers Perrin, says, "There
are some systems or methodologies for ranking which have been researched and
use criteria tested against discrimination, although they can still be used and
applied badly." But he adds, "Multiple criteria developed in a
consultative way with employees and tested for fairness are obviously
safer."
Rubens says, "Performance management is about setting goals and
identifying people who are meeting those goals. The process needs to be
scrupulously managed and the classic way is using a variety of statistics. Managers
might be used to dealing with promotions and pay within the process, but they
have to be trained in rating pay and promotions objectively."
Before the review process, Microsoft trains its line managers in how to
handle the review, why the com-pany pays and rewards as it does, and how to set
personal objectives. Harvey adds, "We do calibration as well. We sit down
with managers from different departments and find out what would achieve 3.5
points in other departments and how that compares to 3.5 points in human
resources."
Although the ranking is left to line managers, who have monthly,
face-to-face meetings with staff to discuss their development needs and
performance, HR is involved in the overall management of the system at
Microsoft.
"HR people are trained to look across the review model to make sure it
makes sense, and to look at how the bell curve is managed," says Harvey.
"HR also checks individual cases. If a line manager gives someone 3.5
points and then, in three months’ time, says that person is not working out, we
need to check the manager is up to the review process." HR is also
responsible for checking that diversity is managed correctly.
But no matter how well forced grading is applied, there can still be
situations where it is seen to be unfair, says Rubens. "There are
situations where, for example, an employee is doing well under one manager, but
under a new manager their performance drops. Or an employee has been doing well
for a couple of years, then the something changes and they find they are not
doing as well. The problem with forced ranking is that if your performance does
not improve, you risk being kicked out," he says.
Bob Garvey, principal lecturer at Sheffield University, adds, "People
always say these things are objective, but at the end of the day you have one
person judging another."
It is these aspects of forced grading that have landed a number of companies
in court in the US. Corporates including Microsoft, Ford Motor and Conoco have
been accused of using forced ranking to discriminate against certain parts of
the workforce, favouring white males over blacks or younger managers over older
ones, for example.
But it is not just the legal aspect that companies adopting forced ranking
need to consider. Many see the process as a blunt instrument that can create as
many problems as it solves. Garvey says, "Forced ranking is an attempt to
simplify the complex and in doing it, you end up with different problems that
you have to try to manage."
"With any performance measure, there are some quantitative things, but
a lot of it is qualitative. Selling, for example, is largely about
relationships, and if you give someone a sales target, how do they go about it?
They could reach their targets, but, in the meantime, they will have annoyed
all your customers.
"You can end up chasing your tail with these things and find they don’t
add much to an organisation. If, instead, you involve people in decisions and
the decision-making process, and link corporate goals with personal objectives,
you end up with people who are genuinely motivated."
Graded ranking can also stifle risk-taking and it works against the team
culture that many corporations are trying to develop. At Microsoft, Harvey
agrees that this would have been a fair criticism of the company’s system until
three or four years ago. Since then, he says, Microsoft has also started to
grade employees according to their cooperation with colleagues and respect for
customers. It has also recently introduced feedback from staff as one of the
criteria for grading line managers.
Adopters still need to be aware of the kind of culture that forced ranking
can create, says Rubens. "It’s the kind of system that develops an
undercurrent in the organisation. A sub-culture tends to evolve where even people
who work the system well tend to start resenting it. They become more reluctant
to take risks."
For example, says Rubens, "You might have a company that decides to
start up a new product line and it wants the best people on the project. If you
use forced ranking, people being taken on to the project would have to
recognise that they may drop from their number one position and could slip far
down in the ranking."
Teams that include high performers will suffer under forced ranking because
their managers will be forced to identify weaker members – even if their
performance is much higher than their counterparts in other teams.
Brown adds, "If you use these systems for reward and development, they
come into conflict. Employees are discouraged from discussing any areas of
weakness they might feel they have, which could be helped by training, because
it could affect their level of pay."
It is up to companies to decide whether the positive consequences of forced
ranking outweigh the negative. Any downturn in the economy might persuade them
that it is worth trying, says Brown. "There’s no doubt that in times of
recession you see the emergence of a more macho management, so we will see more
of forced ranking.
"But my feeling is that companies will be loath to use the system on
its own. In a redundancy situation, it might be one of the methods used, but it
will be one of a range of methods.
"Companies might use it for particular purposes in the short term, as
against General Electric, which uses it irrespective of the economic
situation."
Sign up to our weekly round-up of HR news and guidance
Receive the Personnel Today Direct e-newsletter every Wednesday
Brown concludes, "But in the longer term, if you look at all the
developments that have taken place within companies involving improving
communication and building partnerships and team work, then having a system
with a league table that sets people against everyone else is
contradictory."
