It’s about time: this past Tuesday, news leaked that Microsoft is ending its oft-criticized stack ranking system in favor of a model that encourages cross-group collaboration. The stack ranking system required managers to evaluate employee performance by “grading on a curve” – which resulted in infighting, the exodus of lots of talented people and probably more than a few inappropriate firings.
I first heard of a stack ranking system when I read about Jack Welch’s implementation of a similar system at GE, colloquially known as “rank and yank.” Welch’s philosophy was that the bottom 10% of employees must go, no matter what actual results they have achieved. I’d say that the GE system was one of Welch’s worst ideas. Reports of GE employees’ gaming of this system (you scratch my back, I’ll scratch yours) were rampant. Fortunately, GE phased out the “rank and yank” system after Welch’s departure.
There are reports that other tech giants have adopted some form of the stack ranking model; Amazon and Facebook seem to have similar systems. Reports are that Amazon’s system has not been good for employee morale.
I think it’s always a mistake to base employee evaluation systems on tiers and percentages (i.e. 10% are top performers, etc.). Any time you parse people into tiers, you are potentially pitting employees against each other. Naturally, all employees will want to be in the top tier, and many will figure a way to get themselves there, potentially at the expense of their fellow workers. Bottom line: tiered ranking systems are ripe for being gamed.
Another problem with ranking systems is that they are statistical models that often break down when they are applied to individual people. Whenever you treat individual human beings as statistics, you are potentially headed for trouble – especially when one individual’s performance or circumstances clash with the statistical model.
Tiered employee ranking systems are a great temptation for corporate execs because of one cruel reality: there’s only so much “pie” to go around. Even highly profitable and growing companies must dole out salaries and raises per a budget. From the employee’s point of view, corporate employment – in reality – has a limited “upside.” So it’s natural for execs to want to create an “entrepreneurial” environment. Necessarily, they must create one that won’t blow that budget. In real entrepreneurial situations, it’s problematic to gauge entrepreneurial success by saying “I made more (or lost less) money than 90% of my fellow entrepreneurs.” The same is true in corporate environments.
Call me old fashioned, but I prefer an evaluation system where employee performance is measured against a set of corporate, group and individual objectives. Salaries and raises are determined by a combination of performance relative to objectives, balanced against the budget available for labor. If everybody in my group does a super job relative to all the objectives, they all get raises. If they all screw it up royal, they all get demoted or fired. The individual employee’s salary and position are based on actual performance and actual budget.
I do believe that the objectives set for each employee’s performance need to be multi-faceted and must include group and corporate performance. I’m a fan of “balanced scorecards” that include cultural and human contributions, such as collaboration with other employees. Microsoft’s new system appears to be headed in this direction. Let’s hope it takes.