Compensation systems do not often make the pages of Vanity Fair, however the exception was a long article on Microsoft in 2012. The article blamed the forced ranking (aka stack ranking) system for causing massive problems.
The writer said:
"Every current and former Microsoft employee I interviewed-every one-cited stack ranking as the most destructive process inside of Microsoft, something that drove out untold numbers of employees."
Vanity Fair was not alone in their critique. Glassdoor, a site where employees rate their organization, published this comment from a Microsoft software development engineer:
"If you are a developer here, you don't feel like you are competing with the other companies to deliver a better product, instead you are competing with your co-worker. Co-workers will not help each other, instead will backstab each other so that they finish higher in the curve."
Fortunately, it's been recently reported that Microsoft has adopted a new approach to performance management that does away with forced ranking, encourages an on-going dialogue about performance and development, and seeks to build a more unified, collaborative culture.
But why did Microsoft's HR team let something so obviously damaging to innovation and employee engagement go on for so long?
First... a primer on forced distribution and forced or stack ranking
For those of you unfamiliar with this approach, in a forced distribution system the percentage of employees in each performance bucket is fixed. You may be good, but if everyone else is better, then you end up in the bottom bucket. Forced distribution is popular because in an "anything goes distribution" managers too often rate everyone as very good or excellent.
Forced ranking takes this one step further and ranks employees from best to worst; the impact is not very different.
The advantages and disadvantages of forced ranking and forced distribution
The advantages of forced ranking are obvious. It forces managers to make clear decisions about talent, and in particular it forces them to confront poor performance.
The disadvantages are equally obvious, it creates fear and turns employees against one another.
Forced ranking, if it is used, must be implemented with finesse. Do forced distribution too gently and you may not get positive results; do it too harshly and you may cause great harm.
When it comes to your compensation system, rigidity and consequences matter
What really matters is how rigidly this kind of compensation system is imposed and the consequences for a given rating.
Harsh implementations of forced ranking appeal to people who have worked hard and done well in what they see as individualistic, meritocratic systems. Not only do they believe that good performers should be rewarded, they are keen to see below par performers punished.
If you see the world as made up of stars and slackers overseen by weak managers who are unwilling to mete out the required discipline, then forced ranking makes sense.
Many companies used forced distributions but do so in a fairly gentle and flexible way; not many people end up in the lowest performance grade and if a group is seen as having all good performers then the need to rate some people as "poor" is waved.
The system may also be gentle in that the consequences of a poor performance rating are not huge; yes, it pays to get a good rating, but the rating in any one year will not make or break your career.
Forced ranking at Microsoft
At Microsoft the forced ranking system was sufficiently rigid and the consequences sufficiently severe so that cooperating with co-workers came to be seen as a bad idea. The Vanity Fair article quotes a Microsoft engineer as saying:
"People responsible for features will openly sabotage other people's efforts. One of the most valuable things I learned was to give the appearance of being courteous while withholding just enough information from colleagues to ensure they didn't get ahead of me on the rankings."
Forced ranking at GE
Forced ranking was made famous by Jack Welch at GE. There were three special conditions at GE.
Firstly, they had a highly evolved system for assessing performance so that the ranking was credible.
Secondly, it was at a time when Welch felt GE had become fat and he needed to drive change.
Thirdly, GE had a very active leadership development program that relied on giving high potential employees leadership jobs to develop in. It was not just that a mediocre manager might be delivering uninspiring results, they were filling a space that was needed as a developmental role for a high potential.
Who's driving HR decision making?
So again, the question needs to be asked: If everyone at Microsoft knew the ranking system was harmful, why did it continue for so long?
I can't be sure what happened at Microsoft, but too often big HR decisions are driven by the whims and ideology of the CEO rather than the evidence of what works. Case in point: a few months ago there was plenty of talk about stack ranking being one of the main reasons former Microsoft CEO Steve Ballmer chose to step down.
It can be difficult at times to question the whims of your CEO. Nevertheless HR has a duty to push back when an ideology begins to seriously harm the company. The main tool for intelligent push back is to take an evidence-based approach. Consider what the academic literature says about a practice. Gather internal evidence as to whether it is working. Uncover and confront the assumptions underlying the practice.
The consequences of poor HR decisions
It is unfair to blame stacked ranking for all of Microsoft's woes; however it is a case where poor compensation design caused serious problems. HR should not have let this happen.
What remains to be seen is how long it takes to undo the damage caused by Microsoft's old system, or if it can even be undone. Culture is not something you can easily or quickly change.
However as recent news indicates, by doing away with stacked ranking it seems this technology giant is moving in the right direction.
Your turn: Have you seen stack ranking work effectively in an organization? What has been your experience with this performance review practice?