Saturday, September 18, 2010

Causing internal competition and low morale through compensation policy

Over at Mini-Microsoft, Microsoft employees are listing the details of their compensation changes after their performance reviews.

Reading through them, it is pretty clear that almost everyone is unhappy, both with their reviews and with their relative gains. Which is exactly what you would expect.

This is an instructive example of how forced rank and fine-grained compensation adjustments based on forced rank hurt morale and ends up competing people inside a company against each other.

What you want in an organization is people focused on working together as a team. But, when you use forced rank, a fixed compensation budget for the group, and compensation changes tied to rankings, success for everyone becomes a zero-sum game. You can do just as well by bringing down people on your team -- so you look relatively better -- as by helping people on your team. In fact, it is probably easier to do better by dragging down your colleagues because you have direct control over that.

Performance-based compensation sounds great in theory, but never works in practice, partly because managers lack the information and objectivity to implement it well, partly because people never remember what they do badly and so are almost always angered by the review and compensation adjustments.

For more on this topic, please see my earlier posts, "The problem with forced rank", "Management and total nonsense", and "Joel Spolsky on management methods".


Anonymous said...

Yep, it definitely makes for a toxic work environment. So glad to be free!!

Unknown said...

Hit the nail on the head. I hated forced rankings as an individual contributor. I downright abhorred them and actively tried to avoid them as a manager needing to rank people.

Anonymous said...

Absolutely correct. The small bonus budget makes forced ranking a nightmare. Your top performers will feel undercompensated regardless of how much you managed to get them, your perfectly-good-middle-of-the-road folks correctly feel that struggling isn't worth it given the ratio between bonus and base and your underperformers are glad they're getting such a high base.

Maybe if the average bonus was at least 100% salary, we'd get somewhere with this.

Anonymous said...

Google system of compensations and ranks became almost the same as those described by MSers

Anonymous said...

Haven't you heard? Microsoft cased using 'forced ranking' in 2006!

Greg Linden said...

Hi, Anonymous. They didn't actually eliminate forced rank in 2006. They just changed things around the edges, but still preserved the core of forced rank, still evaluating people against each other in the same team, still the same ruinous consequences.

By the way, back in 2006, I had an article on that too on that supposed policy change, not that it matters: