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For Whom the Bell Curve Tolls - The Controversial Practice of Forced Ranking

 
11/5/2001
Performance appraisals used to be a way to reward employees. Now employee rankings are being used to lay off workers as the economy sours. But critics maintain that so-called forced rankings are discriminatory. At Ford, white males said they were shoved aside to make room for younger women and African-Americans. And one African-American at Microsoft alleged in a lawsuit that rankings were used to discriminate against him. Here's how to make forced rankings work.

For Whom the Bell Curve Tolls

During the boom years of the 1990s, performance appraisals were often seen as the basis for determining the size of employees' bonuses. But in the emotionally charged atmosphere of the current slowdown, employees fear that a poor performance review means they're about to be shown the door. Forced ranking, a practice that has been around for decades, has become a lightning rod for all this anxiety.

In contrast to competency-based evaluation methods, which assess an employee's progress in mastering certain job—critical skills, forced ranking analyzes performance relative to some peer group. In so-called totem-pole approaches, each person gets a unique number—say, 275th out of 1,150 workers in the firm. Other companies are less granular, using bell curve distributions to separate employee performance into broad categories or bands. Enron, which, in Fortune magazine's current list of most admired companies, ranks number two in terms of its ability to attract and retain talent, uses a five-point scale: The top five percent of the workforce gets the highest ranking; the bottom 15%, the lowest. Many companies use 360-degree performance evaluations as the starting point of their ranking deliberations. At Synygy, a Conshohocken, Pa.-based firm that provides enterprise incentive-management software and services, any employee can anonymously evaluate anyone else in the company. (The manager of a person under review knows the identities of these anonymous evaluators, and can thus screen them for potential bias.) But the fundamental reality with forced ranking, says psychologist Kathy Jordan, executive coach for the global executive-development consulting firm KRW International (Minneapolis), is that "only a few people can be best performers. Similarly, some people have to be slotted into the lowest rank, even if their performance, using a competency-based assessment, is satisfactory."

Employees who receive the lowest ranking are typically offered coaching assistance. Still, they know that their jobs are in jeopardy, although the length of time they have to bring their performance up to snuff varies. Under the system Ford scrapped this past summer, it was a year; at Synygy, it's usually just one quarter. Companies also differ in terms of how broadly they apply the practice. Some use it just for the very top tiers of management. Others, worried that they're overstaffed because voluntary attrition rates have fallen—many employees are hesitant to leave or take early retirement in a downturn—have begun to force rank all exempt employees.

Forced ranking is now practiced, according to some estimates, in 20% of U.S. companies, including a few of America's most respected corporations. But a rash of lawsuits has made people wonder whether the practice isn't inherently discriminatory. At Microsoft, one African-American plaintiff claims he was discriminated against because of his race. At Ford, white males have alleged that they were moved out to make room for younger women and African-Americans.

Beyond all the legal wrangling, however, there's a larger question: Is forced ranking the only, or best, means of improving the average quality of the workforce? A point-counterpoint summary of the principal lines of debate follows.

Point: Companies must focus on more than just their top talent. In their new book, The War for Talent, McKinsey & Company consultants Ed Michaels, Helen Handfield-Jones, and Beth Axelrod argue that the failure to deal with low performers—especially low performing managers—reverberates throughout an organization. Identifying the top performers, rewarding them handsomely, offering them special coaching, and giving them plum assignments are standard operating procedures these days, they maintain, but companies must be more thoroughgoing in this practice of differentiation. Nearly all high performers want a corporate culture with "a strong performance orientation and an open, trusting environment," the authors write. But when companies don't act "decisively on the C players [the bottom 10% to 20% of the workforce] either by helping them raise their performance or by removing them from critical positions," the advancement opportunities for more productive employees become blocked. Subordinates don't get developed as well as they should. Productivity and morale sag. Fewer A players want to join the firm. High performers inside the firm start to feel that it's being mismanaged. Before long they begin to leave, taking with them the strong positive impact on profits for which they're largely responsible.

Counterpoint: Concerns about demotivating top performers are "true to a point," says Jordan. "It's fine to use forced ranking if you have slackers who need to be culled out, but once you've eliminated all those, you're cutting out people who are competent. There's a point of diminishing returns here. Forced ranking encourages employees to work against other employees in an effort to supplant them in the rankings—what's the impact going to be on the corporate culture as a whole, and in particular on values such as collaboration? Moreover, arbitrarily terminating the bottom 10%, especially when it includes good people who have performed adequately, can create feelings of survivor guilt in the remaining high performers." Furthermore, when you search for the productivity benefits of the terminations that forced ranking paves the way for, you can't always find them. "Job cuts make more sense when establishments experience excess capacity than when they do not," writes Peter Cappelli, professor of management at The Wharton School of the University of Pennsylvania. "Even in such situations, however, the benefits of improvements in sales per employee must overcome increases in labor costs per employee." In other words, involuntary terminations sometimes diminish corporate performance—so much for the across-the-board motivational benefits that proponents of forced ranking claim.

Point: Companies need to have some objective means of justifying layoffs. Critics of forced ranking say that it intensifies the dangers of managerial subjectivity. Dick Grote, president of Grote Consulting in Dallas, counters by saying, "Companies and managers have always ranked employees. What's different now is that with forced ranking, we're requiring managers to treat systematically a process that was once handled casually."

Quotation
Forced ranking is now practiced, according to some estimates, in 20% of U.S. companies, including a few of America's most respected corporations.
Quotation
—Loren Gary

To Mark A. Stiffler, president and CEO of Synygy, forced ranking helps "operationalize our company's core values, one of which is a client-centered focus." Coworkers' and subordinates' evaluations account for much of a Synygy employee's ranking. As Stiffler sees it, when an employee is terminated, "the coworkers and clients are essentially the ones doing the firing."

The more objective your bases for ranking employees, the less likely you are to be hit with a class-action lawsuit, Stiffler continues. For example, to substantiate a low ranking for a sales employee, be prepared to cite statistics such as his average monthly sales volume and the number of contacts and sales calls he made.

Counterpoint: Many experts believe that small groups pose big problems for forced ranking. For example, assessing the individual contributions of members of a network team—a team whose success depends on its ability to improvise, take on projects as they arise and see them through to completion with little direct oversight—is exceedingly taxing, even for seasoned managers. It's difficult to keep subjectivity from entering into the evaluation. Moreover, where is the equity in a system that marks for possible termination the lowest-ranking member of a group of overachievers, even if his productivity is superior to the highest-performing employee in another group?

Companies attempt to compensate for these problems through roll-up meetings, says Grote; applying the rankings over larger groups of people enables you to generate valid bell curve distributions. "But in these roll-ups," says Jordan, "perceptions of favoritism and politics usually enter in." The process can easily devolve into horse trading, with one manager agreeing to support her colleague's ranking of his direct report if the colleague will do the same for one of hers.

The arbitrariness of forced ranking undermines any claims to objectivity, KRW's Jordan maintains. "If you're confident that you've been doing your hiring and development right, such that you've got a high percentage of top performers in your workforce, why are you arbitrarily assigning many of these people to the middle and lower ranks?

"The temptation is to use forced ranking to cover up performance problems that haven't been addressed—for example, when managers have been lazy or haven't developed their talent properly. But if you're getting people to perform at high levels and to grow over time, and getting rid of the people who can't perform to a certain level of competence, then forced ranking is unnecessary."

So why do bellwether companies such as GE remain unconvinced? Part of the answer may be that they have robust and trustworthy performance appraisal systems in place. For forced ranking to work, your performance appraisal system must:

  • have dimensional consistency. Its scales and criteria must be applicable across all employee categories.

  • be based on objective data. As Grote cautions, "You just aren't going to be able to find quantitative measures for everything that is important to you. But you can still be objective—you can make decisions that are not colored by your emotions or personal preferences."

  • produce rich analytical feedback. Employees value meaningful assessments of their work more than any other performance motivator.

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Reprinted with permission from "The Controversial Practice of Forced Ranking," Harvard Management Update, October 2001.

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