Stack ranking, a 30+-year-old, controversial HR practice, blazed into the headlines recently with Yahoo’s announcement of implementing a form of stack ranking in its quarterly performance review process. Meanwhile, Microsoft, which has been widely criticized by the public and its own employees for using stack ranking, saw the light, with its plan to eliminate its rank and yank system. All of which suggests that it’s a good time to review stack ranking.
Stack ranking refers to the performance appraisal process where employees are not only ranked but also typically the lowest 10 percent are fired. It originated with Jack Welch when he was CEO of GE as a process for managers to get rid of poor performers. Welch was concerned that managers would not make the difficult decision of firing someone on their own. Welch did many right things at GE but “rank-and-yank,” the sarcastic term for stack ranking, is not one of them.
Stack ranking works best to create internal competition and pit one employee against another, in the end devaluing the performance of all employees who are not at the top. In fact, it doesn’t motivate employees on the bottom to improve, and believe it or not, it does not motivate those at the top to reach higher.
The assumption behind forced ranking in a business is the wrongheaded idea that employees performance will fall out along a Bell-shaped curve with some people clustering around the mean with a few very high and very low performers. That theory has been debunked over the years, practically and scientifically. In a white paper presented at the Massachusetts Institute of Technology (MIT), its authors noted that the Bell curve may not in fact be an appropriate model for organizations. Since the Bell curve is based on a random distribution of the measured attribute, it is an unsuitable scale for performance evaluation unless HR seeks to hire on a random basis.
Indeed, even those who should be enthusiastic about ranking systems are far from its champions. A 2010 Sibson Consulting study found that 58 percent of HR managers dislike their own review systems.
So, what should organizations do?
Performance-based pay aligns pay with performance. In a performance-based pay system, the pay is the appraisal. The Bob Barker Company, a North Carolina based correctional clothing and supply firm, has had a successful performance-based system. In 2009, the average merit increase for U.S. employees was 1.4 percent (if anything), whereas employees at Bob Barker earned, on average, a 6 percent pay increase, followed the next year by an 8 percent increase. The results also extended to the bottom line and the company experienced a 10 percent decrease in sales but managed a 16 percent increase in net income. To achieve this success Bob Barker implemented a pay-for-performance system by developing an overall balanced scorecard of priority business results for the company and associated employee scorecards that linked every functional group to those results.
Mary Kay is an example of a company using a “rating process,” instead of stack ranking. With rating, an organization establishes criteria that are based on individual goals that all employees have the potential to meet. The company’s genius has been to understand that recognition can be as important as cash in motivating people. Hence, the pink Cadillac, lavish company-paid, five-star vacations and diamond bracelets. Since it launched its car incentive program in 1969, the company claims that 100,000 people have earned one. It would gladly award many more because the criteria for earning one are based on sales that benefit the company.
One caveat of performance pay is that its success depends on the variables chosen as the basis for pay. Choose the wrong metrics and the system doesn’t work. Choose them correctly and employees and managers thrive. If it’s a problem to change to a performance based pay system, a performance bonus system also works well. As in performance-based pay, you have to be strategic in the criteria for the payout. Remember it’s a performance bonus, not a giveaway. Dr. Alyce Dickenson, Professor at Western Michigan University has consistently shown that even a relatively small performance bonus opportunity outperforms traditional pay and bonuses.
Back to Yahoo. President Mayer has instituted a system that progressive companies have long since abandoned or are in the process of abandoning. It could not come at a worse time as the company needs “all hands on deck.” Ranking will definitely not accomplish that. I suggest that she look to strategies that unite employees rather than divide them.
Aubrey Daniels, Ph.D. is the founder and chairman of workplace consulting firm Aubrey Daniels International and the newly launched Aubrey Daniels Institute. Dr. Daniels, who coined the term “performance management,” has written six management books, including Bringing Out the Best in People: How to Apply the Astonishing Power of Positive Reinforcement, Performance Management: Changing Behavior That Drives Organizational Effectiveness, Measure of a Leader, and Oops! 13 Management Practices that Waste Time and Money (and what to do instead).