Ranking employees falls out of favor with companies

August 5, 2012 at 12:00a.m.

Atlanta Journal-Constitution

ATLANTA

Many American companies that had adopted a much-praised employee-evaluation system lately have 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, which are doing badly. A good evaluation system encourages creativity, spurs productivity and lifts morale.

So why did 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.

Vanity Fair notes that Apple Inc. now has more revenue from one product — the iPhone — than mighty Microsoft Corp. has in all its businesses combined. The article, by Kurt Eichenwald, portrays the company’s culture as “cannibalistic.” Microsoft’s response to the Vanity Fair story: The company’s performance-review system is designed to “provide the highest rewards to employees who have the highest impact on our business 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, said 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 said. “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.”

Some large companies have dropped the forced ranking system. Others have avoided the bandwagon altogether.

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? Doesn’t ranking make a certain sense? What is 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 them 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’s Buckhead neighborhood, the 60-person staff needs to work together, and employees are expected to understand that, said Lance Jaglarski, general manager.

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

Workers are evaluated, but not ranked, he said. “We just look at it completely different.”

At its worst, ranking produces a toxic culture in which workers aim to make themselves look good and rivals look bad, not focusing on making the team succeed. Microsoft employees, for example, for many years made money on their own stock. But the stock price stopped surging.

“Then, the only way to make more money was to step over each other,” said Peter Cohan, a Massachusetts-based consultant in management and venture capital. “It twists the way that people behave.”