Forced Ranking: Right for You?
Forced ranking was popularised by Jack Welch early in his tenure at General Electric. Several high-profile companies followed suit, among them Conoco, Hewlett-Packard, Microsoft and, notoriously, Enron. As many as 20 per cent of large companies now apply forced ranking. There's no single way to do it - the concept encompasses any system in which individuals are ranked against one another. Probably the most popular method is to set the distribution according to a bell curve, designating, say, 10 per cent of employees as top performers, a middle 80 per cent as the unspectacular but necessary backbone of the company, and the remaining 10 per cent as the bottom-feeders. Other companies rank employees on a totem pole, one above another. Still others divide the staff into quartiles. Usually the stars in the top group receive the lion's share of development and bonuses, while the bottom-dwellers get a pink slip or, at the very least, a warning.
Often, only senior executives and managers are force ranked, in order to identify and groom potential future executives. Other companies force rank all of their employees. When CIOs apply forced ranking to their IT organisations, usually all staffers get ranked against one another according to some criteria, such as the contribution that they made in IT to the company's success.
Forced-ranking schemes all assume that something is amiss in an organisation's performance or development plans. Not everyone can be above average, after all. Bill Haser, CIO of Tenneco Automotive, a $US3.5 billion manufacturer of car and truck parts, says he instituted forced ranking in his IT organisation for that very reason. "We know our organisation isn't as good as the performance reviews would lead us to believe," he says.
McKesson's Smith has advocated distinguishing employees' relative contributions to the company since moving into IT management from Ernst & Young in the early 90s. At McKesson, where she became CIO on October 1, 2002, she identifies not who to fire, but who to reward. The superstars in the top group are in line for raises, bonuses, opportunities for advancement and other perks. The solid performers in the large middle group get some financial remuneration for their efforts. The low performers get zip. "Most people, when you give them a very poor rating and when you don't give them a raise and you don't give them a bonus, leave the company [on their own]," she says.
Smith would seem to have found the perfect management model - a self-fulfilling performance ranking. Yet opponents of the forced-ranking concept point out several negative side effects. Ed Lawler, who wrote Treat People Right! and other books on performance and founded the Centre for Effective Organisations at the University of Southern California's Marshall School of Business, argues that rather than raising the bar for performance inside organisations, forced ranking - as it is usually applied - creates a dysfunctional, hypercompetitive work environment. While interviewing current and former Enron employees about the company's corporate culture and forced-ranking process before its fall from grace, Lawler found that employees refused to collaborate with one another.
"They would hoard knowledge, hoard customers, because the last thing they wanted to do was share information with the people they were competing with," Lawler says.
Another disadvantage of forced ranking, particularly when applied to IT groups, is the high cost of turnover and the difficulty of quickly finding employees with the right skill sets. For her part, Smith believes that any costs of hiring new people into her organisation to replace poor performers are offset by an increase in overall productivity.
Some companies using forced ranking have become embroiled in discrimination lawsuits brought by employees upset over dismissal or lower pay. Conoco, Ford Motor and Microsoft have all faced such suits. Lawler says companies that use forced ranking get into trouble with litigation when the criteria they use to evaluate employees are too subjective - for example, a vague metric of "contribution made to the company". A more defensible measure is a relation to something concrete, such as sales figures. But that poses a difficulty for CIOs, Lawler says, since IT employees rarely have a direct impact on a company's sales or profits.
Clearly, forced ranking shouldn't be used lightly. Even Grote, the performance consultant who's a vocal proponent of forced ranking, doesn't believe it should be done every single year. "The first time [you do it] you're cutting the obvious fat. The second time, you're cutting the interstitial fat. By the third time, you're getting down to muscle and bone," he says.
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