Ranking employees falls out of favor

ATLANTA -- Many American companies that had adopted a much-vaunted employee evaluation system have lately 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."

A forced ranking system can be unfair. What if all team members are competent? What if the difference between the best and the worst is marginal? What if different managers judge differently or -- even worse -- play favorites? And what about people who have different strengths?

"You need a balance of skills and motivations," said Juergen Meyer, Atlanta-based principal in UHY Advisors, tax and business consultants.

"You need natural leaders of a team, but you also need people doing the work."

Different strengths are also hard to rank, he said. "It's comparing apples and oranges."

What's more, forced ranking can be expensive. Companies could be cutting people they've already spent a lot of money hiring and training, said Deb Keary, vice president of human resources for the Society of Human Resources Management, an association that represents about 258,000 HR professionals.

"If you are trimming your workforce down or replacing people, you've got a big expense there," Keary said.

At Society of Human Resources Management itself, the 400 employees are evaluated but not compared, she said. "Everyone has different contributions that are unique to them. We rank them as to how well they are doing -- not compared to other people." Forced ranking is "the most draconian method" of evaluating employees, she said.

In some ways, the previous embracing of forced ranking reflected the struggle of companies that wanted something effective -- and straightforward. They reached for an answer that worked for someone else, said William Bogner, professor at Georgia State University's Robinson School of Business.

Yet every company is different and a solution needs to match the situation, he said.

"There is a desire to have a single, one-size-fits-all solution and there is never one size that fits all," he said. "There is no short-cut to good management of people."

The debate about ranking is not new. In a 2006 piece in the Harvard Business Review, two Stanford University professors criticized forced ranking and said the approach had been "hyped" by the likes of McKinsey & Co., which published a book praising the approach and companies that used it. Among those praised was Enron.

A McKinsey spokesperson in July declined to comment on the subject.

The professors wrote that research showed the results of ranking were "lower productivity, inequity, skepticism, decreased employee engagement, reduced collaboration, damage to morale and mistrust in leadership." Even so, there is one exception, where most critics say ranking is justified: sales. For decades, sales workers have been ranked according to the dollar figure for which they can claim credit.

Everyone in the field understands and expects that, said Ronco Johnson, president and CEO of L.R. Johnson & Associates Inc., a Marietta, Ga., insurance consulting firm.

"The insurance and financial services industries are all about ranking," he said. "All of a sudden, you are on the curve."

At Cbeyond Inc., an Atlanta-based telecommunications company, managers are supposed to sit down monthly for a one-on-one "to see how they are doing toward their objectives," said Joan Tolliver, vice president for human resources. "It forces communication. If you don't have the right objectives for employees, you won't get the results you need."

At year's end, every employee gets graded, results that shape how they are paid. There is no quota for either high or low scores, she said. "But it's interesting. It does kind of resemble a bell curve when you finish."

Yet with more than half of its 1,700 employees in metro Atlanta, the company's most important judgment may be the first one, she said. "We have to carefully choose when we hire -- to make sure we hire the best we can."

Even the companies that reject ranking say they see its benefits -- incentives for top employees, paring of nonproducers, clarity about who is valuable and the aim at constant improvement.

"I understand the rationale. I don't agree," said Selina Dominguez, director of organizational learning for Atlanta-based carpetmaker Interface Inc.

Most evaluations focus on negatives, she said. "We want to shine a light on the good. There is absolutely no ranking. We are all working toward the same goal and it's all about how do we get there."

Interface managers have a harder job than slapping a number on employees, she said. "No grades -- these are dialogues."