Sunday, September 10, 2006

The problem with forced rank

Kelley Holland at the NYT writes an article called "Performance Reviews: Many Need Improvement" about problems with forced rank.

From the article:
Under this system ... managers sort fixed percentages of their employees into categories like "superior" or "needing improvement"; those in the top group typically receive the best compensation, training and promotions while those at the bottom may be denied raises or promotions, or even fired.

Critics ... contended that rating -- and even firing -- employees by using a statistical curve hurt morale and teamwork, and that vague standards opened the door to bias.

Empirical evidence is mixed on the effectiveness of forced rankings. A study last year ... found that if a company used the ranking system and fired 10 percent of lower-ranked employees, that company's performance improved markedly, but the gains shrank rapidly in successive years.
On this last point, I suspect that the initial gain is because the forced rank is used at first to fire employees who should have been nudged out of the company a long time ago. After that first win, further gains are lost to damage to morale and team cohesion.

Here, it is worth considering the results of a study described in Worth Magazine (PDF) on the relationship between morale and company performance:
Our research shows repeatedly that the relationship between morale and performance is reciprocal -- a "virtuous circle."

In both 2004 and 2005, the stock prices of companies with high morale ... outperformed similar companies in their same industries by a ratio of 2.5 to 1. Meanwhile, the stock prices of companies with medium or low morale lagged behind their industry peers by greater than 1.5 to 1.

Why is high employee morale so strongly related to stock prices? Morale is a direct consequence of being treated well by a company, and employees return the "gift" of good treatment with higher productivity.

There are three factors that fuel employee enthusiasm: fair treatment, such as equitable wages and benefits ... a sense of achievement or pride ... and camaraderie among co-workers.
I think the "gift" point is particularly important. Treating people well can be seen as a form of gift exchange, creating more of a friendship than purely economic relationship between the company and the employees. Put simply, people care more about a company that cares about them.

Back on problems with forced rank, I enjoyed this tidbit at the end of the NYT article:
Critics of performance reviews have been around for a very, very long time. When the Wei dynasty in China rated the performance of its household members in the third century A.D., the philosopher Sin Yu noted that "an imperial rater of nine grades seldom rates men according to their merits, but always according to his likes and dislikes."
Ah, yes, wouldn't it be wonderful if modern management could learn lessons that were apparent 1750 years ago?

See also my May 2006 post, "Microsoft drops forced rank, increases perks".

See also my April 2004 post, "The Human Equation".


Anonymous said...

Force/curve ranking is ridiculous, and especially at odds if you have any kind of hiring standards practices (which MSFT claims to have). I will say that in most companies, there are at least 10% of the people that can be lopped off without any hit to productivity/output. I'd go so far as to say in most companies, the forced departure of the weakest 10% would result in a net productivity gain (less time spent bitching and moaning about the losers and/or re-doing their mistakes). Just to be clear, managers are not exempt from being in the bottom 10%. And firing a loser of a manager will usually create a significant up-tick in productivity.

BTW - the virtuous circle you describe sounds like The Pygmalion Effect to me - where if you expect good things of people, you unconsciously alter your behavior in ways that encourage those people to do good things.

Personally, I'd do the following:

1) ID and fire the losers (esp. the managers). It could be as high as 20% if you have lax hiring and performance standards for a long period of time. This also serves to put “marginal” people on notice, and bolsters the morale of everyone else (esp. the star performers who wonder why they even bother when the losers aren’t ever penalized).

2) Institute regular performance reviews that are separate from pay increases. People should have expectations for their work set and understand whether or not they meet those expectations outside of any effect on their compensation.

3) Reward the hell out of the star performers, but not necessarily publicly. There are people who actually contribute 10x as much as the average person, and I think they should be rewarded in whatever way is most meaningful to them (money, training, better assignments, time off, public recognition, etc.). Yes, this requires work on the part of the manager. Suck it up, that’s why you get paid to be a manager.

4) Put people on notice/PIPs when they don’t meet expectations (no surprises that way, gives people a chance to improve). Fire people that continually don’t meet expectations and let them/others know (basically) what happened.

5) Give the average-to-good performers fair (but similar) merit increases and other rewards when they meeting expectations Also, communicate with people early when financial circumstances temporarily don't allow for merit/COLA increases. But try to be creative in rewards - even when money's tight there are other options.

Greg Linden said...

On (3) and (5), I am concerned that merit increases often are not perceived as fair (damaging morale) and can create a zero-sum game where employees compete against each other for raises (damaging teamwork).

You never want employees competing against other employees for higher compensation. The path to success should be to compete against other companies, not to tear down others in the same org.

Anonymous said...

Your suggestion requires that there are other companies to compete against - which is irrelevant to an enormous amount of positions. If you work for a non-profit, who are you competing against? If you work in corporate/internal IT, who are you competing against? You can't incent everyone this way, and judging from the Microsoft and Oracle examples, over-promoting the "lets crush our competitors" more often hurts the company in the long run.

Regarding #5, I'm largely conceding that most people should get similar merit raises - not based on a curve of where they are compared to their other co-workers. But there are inevitable discrepancies, based on where people came in on the pay scale, etc. These sometimes have to be "corrected" with unequal merit increases. If there's a clear rationale for this, the "unfairness" perception is diminished.

Regarding #3, I think it's only fair that the 5% (at most) of people who contribute far more than others are held up as the ideal and the retention efforts are proportionate to their contributions - if for nothing else than ensuring the company continues to reap the benefits these individuals provide.

Moreover, I've seen that if people don't see a difference between the #1s and the #9s (even if the #10s were fired), most #5-9s won't aspire to be #1-4s.

BTW - no where in my system did I say that your performance has to be based on tearing anyone else down. Make part of the expectations your ability to get along with your co-workers. Make the #1s the people who inspire others the best.

It's like with pets, reward what you want repeated :-)

Anonymous said...

As an overall comment I would say that in good (i.e. successful) companies good people respond well to good treatment.

If you are trying to improve performance across the board careful use of forced ranking can be a great motivator. It is tough to make a company's culture more performance oriented without something like this.