Friday, May 19, 2006

Microsoft drops forced rank, increases perks

Todd Bishop at the Seattle PI reports that Microsoft is dropping its much hated forced rank system and increasing employee perks.

An excerpt:
We are retiring the 2.5-5.0 rating scale and introducing a three point Commitment Rating scale of Exceeded, Achieved and Underperformed. ... There will be no forced distribution (i.e. curve) associated with this commitment rating, which allows managers and employees to have a more candid discussion about performance.

We're planning to provide on-campus access to a variety of services, including laundry and dry cleaning, grocery delivery from Safeway and opening convenience stores -- all of which are designed to ease the burden given the hectic pace of life. We will expand and upgrade dining services adding great new retail food in select cafes, dinners to go from Wolfgang Puck and other services. We are also arranging discounts on a variety of home services including house keeping, yard care, pet care, auto services and more.
See also this WashTech article that blamed the forced rank reviews and compensation based on forced rank for poor morale at Microsoft.

See also my previous post, "Early Amazon: Just do it", where I said, "While merit pay sounds like a great idea in theory, it seems it never works in any large organization ... It never makes people happy."

See also my previous posts, "Free food at Google" and "Microsoft cuts benefits".


Anonymous said...

I'm not sure how removing the force rank/curve is an indictment of the concept of merit pay. To me the definition of a merit pay is that I, as a manager, attempt to dole out the largest monetary rewards to the best people. A good review system also states that performance reviews are independent of the eventual monetary reward. I fail to see the inherent problem with this.

For example, if I have 10 great people in my group at MSFT, they should all get a great performance review (i.e. “exceeds expectations”). I might choose, because of the limits of my department budget, to give them all the same (small) merit increase. Or, if one of those great performers lags the group in salary because they originally came in at a lower level, they might get more to equalize their pay. Or, I might petition senior management to say that I deserve a larger chunk of the merit increase money because my group is all above average. I can do all three with the new system. Or, if I have only two or three people whose contributions far exceed the value provided by others, those two or three should get more of the rewards (including merit pay increases) that I have available.

The new system makes it more possible to reward people based on their "absolute" merit. Before everyone's performance was ranked relative to the others, meaning that you were often penalized for being in an over-performing group (i.e. you can only have one top performer). Ranking employees against each other also guarantees that employees would focus more on currying favor with me than working together to achieve departmental goals. But that’s a separate issue than whether or not the set employees that contribute the most deserve the most rewards.

It was the ranking system more than the actual pay increase issue that was the problem. My opinion is that if you can honestly say that an employee exceeds your high expectations, the company should work hard to give that employee out-sized rewards. I say you focus 50% of your rewards on retaining your besttalent , who may only be 10% of your workers. The other 50% should be doled out to everyone in the middle, probably evenly. And the bottom 10% should just be fired.

Those “exceeders” are the ones that contribute the most to company productivity and success, by a huge factor. Note that the rewards I speak of may take the form of a merit increase, extra time off, interesting project assignments, etc. But they’re all “merit increases” in the sense that they reflect the meritorious performance of those individuals.

Greg Linden said...

Hi, Anonymous. The inherent problem is that you don't want Microsoft people competing against Microsoft people for higher compensation. The path to success should be to compete against other companies.

With merit compensation, Microsoft employees may see a path to success in competing against other people at Microsoft. It starts to look like a zero sum game; one way to increase your pay is to drag down those around you. That can be quite destructive.

With high but flat compensation, everyone at Microsoft is doing well. Rewards come only from helping Microsoft succeed against other companies, not from competiting against your own team.

Anonymous said...

I hear what you're saying, but disagree with your conclusion. Merit pay does not automatically create "internal competition". You seem to be conflating the general concept of getting paid more for your merit with Microsoft's specific (and bad) implementation where merit and pay are closelylinked. MSFT's old system that force ranks people against each other creates counter-productive behavior, where people focus more on their relative rank than on actually helping the group. However, merit pay and encouraging activities that help the overall company aren't mutually exclusive.

It's possible (and I've been in places like this) to have a merit pay system that ranks people on an absolute scale, so you can have more than one or two "top performers" who are rewarded in ways much larger than the "average performers". And, in rewarding everyone who performs at that top level, you show others that if they too, perform at the top level, they'll get those rewards as well. Roughly, this is how things work at GE.

I've also personally encountered "flat" systems that lead to declining interest in doing anything out of the ordinary. In fact, I've seen it force a downward trend in innovation and productivity over time, as people realize that there's not much difference in pay between being at the top and in the middle.

Anonymous said...

Also - an employee's positive/negative effect on the group, overall, can easily be worked into your performance review. That's what I do. Work in peer reviews as part of the cycle. Work in "overall contribution to the success of the department at the company" as part of the performance review. I could go on.

Fundamentally, I'd rewrite your second paragraph in the comment to be "With Microsoft's old force-rank/curve/3.0 system and the particulars of Microsoft's organizational structure and hiring practices, Microsoft employees focused more on competing against other Microsoft employees for their place on the ladder than moving Microsoft forward"

This is not an inherent part of merit pay/increase systems, but a situation created by bad management at Microsoft.