An article in Vanity Fair attributes Microsoft’s “downfall” in part to a widely used employee performance rating review system called “Stack Ranking.”
VF Contributing Editor Kurt Eichenwald said the stack ranking system incentivizes employees to climb the corporate ladder – not to create new and innovative products. He argues the stack ranking performance rating system has crippled Microsoft’s ability to innovate and contributed to its decline in the past decade.
Stack ranking, also known as forced-choice rating and “rank and yank,” is used by many leading American corporations to evaluate employee performance.
The concept involves ranking employees on a given team from “most valuable” to “least valuable.” One technique is to ask: “if the team was on a sinking boat and we had to decide who we would put on the life-boats, who would be included?”
Employees essentially rank each other and their bosses on a zero to four scale – four being the best. The person with the lowest average score may be given an opportunity to improve or escorted out the door. (That’s where “yank” comes in.)
The stack ranking system was touted by former General Electric CEO Jack Welsh who said corporations owe it to the bottom ten percent of their employees to let them know they have no future with the company. It also is credited with forcing managers to make tough personnel decisions.
The problems seem obvious. What if all the performers in a given team are top performers relative to other employees in the company or field – under the forced choice system, only one of these meritorious employees would receive an optimal rating. One potentially would be forced out. Two would be rated as mediocre. Does this make any sense – especially for a company that wants to encourage innovation?
Not only that but stack ranking seems on its face to be unnecessarily brutal and clumsy – the antithesis of a system that encourages teamwork.
Microsoft has been on notice since 2005 about the perils of the stack ranking system but ignored the warnings.
According to a 2005 study of the stack ranking system at Microsoft by Stephen Gall of Walden University, stack ranking is the fourth most commonly used appraisal technique among the 75% of U.S. companies with performance appraisal programs. Gall said stack ranking should not be used to evaluate employees.
Gall said his research found that smart employees spend much of their time figuring out how to manipulate the performance review system to their least disadvantage – not working to innovate and improve the company.
Gall maintains that stack ranking provides questionable insight into an individual’s actual job performance. He says the rank number is most often based on an unsubstantiated subjective judgment by an evaluator who may feel pressured to respond according to a narrow set of guidelines.
Furthermore, Gall says stack ranking “highly politicizes an organization” and can lead to lawsuits.
If stack ranking is used, he says, stack ranking should be well documented using the 360 degree feedback method, where a variety of stakeholders provide input into the ranking based on objective (or using the least amount of subjective) criteria.
The Alexander Hamilton Institute Employment Law Center suggests proceeding carefully before rating employees as “poor performers.”
The following guidelines are suggested:
- Ensure that there sufficient evidence to support the claim that an employee’s performance is genuinely substandard, and that evidence is properly documented.
- Ensure that there is no perceived or credible argument that any action or poor review can be viewed as retaliatory or discriminatory
- Ensure fairness; Have other’s received such a rating (or been discharged) for similar circumstances?
- Are, or can the ratings be confirmed by an objective third party reviewer?
All of which leads to the question – how can supposedly smart people, such as those in charge of Microsoft, be so dumb?