Ranking employees falls out of favor among companies

ATLANTA — Many American companies that had adopted a much-vaunted employee evaluation system have lately been turning away from it.

Known as “stacked ranking” or “forced ranking,” the process made famous by General Electric Co. is really just a version of what teachers call grading on the curve: a few people at the top, a few at the bottom and the rest clumped in the middle.

The practice leaped into the spotlight — at least for people who study how companies perform — when Vanity Fair published in its August issue a profile of technology icon Microsoft Corp. The company’s malaise, the author argued, was partly pegged to its evaluation system.

Whether a company makes screws or salads, whether it’s a hole in the wall or boasts a hundred global offices, it wants to know which employees are doing well, which are doing badly. A good evaluation system encourages creativity, spurs productivity and lifts morale.

So why did many American companies use a system that experts say is often stifling, demoralizing and counterproductive? And why are they now shying away from it? Generally, rewards and penalties follow the numerical rankings. But not necessarily success.

Vanity Fair notes that Apple Inc. now has more revenue from one product — the iPhone — than mighty Microsoft has in all its businesses combined. The article, by Kurt Eichenwald, portrays the company’s culture as “cannibalistic.” Microsoft’s response to the Vanity Fair story: The company’s performance review system is designed to “provide the highest rewards to employees who have the highest impact on our business success.”

Stacked ranking was popularized by GE during the much-touted tenure of Jack Welch and was adopted by thousands of companies. Yet in 2004, just a few years after Welch retired, GE itself stopping using it.

When Welch took the helm in the early 1980s, GE was struggling. His system greased the skids for job cuts. Looking back, the company gives it credit for making employees more conscious of high performance.

But that was then, said Janice Semper, GE’s manager of executive development. “It was appropriate for the time, but it’s a different time.”

GE still grades employees on performance, but there is no mandate to give a certain percentage either high grades or low marks, Semper said. “We found that at times, we were unfairly putting people there. We don’t get to that rating now by comparing people to one another.”

Some large companies have dropped the forced ranking system. Others have avoided the bandwagon altogether.

According to surveys of “high-performing” companies by the Institute for Corporate Productivity, the percentage using forced ranking has plummeted from 49% to 14% in just two years.

But why? Doesn’t ranking make a certain sense? What is wrong with picking out top performers and targeting poor ones? A lot, many experts and human resource professionals say.

First and foremost, critics say, ranking undermines teamwork. Why help someone if that might vault them above you? Why ask for assistance if it hurts your standing? In many workplaces, teamwork is essential.

For instance, at the Palm restaurant in Atlanta’s Buckhead neighborhood, the 60-person staff needs to work together, and employees are expected to understand that, said Lance Jaglarski, general manager.

“If you are not willing to give help or ask for help, you are pulling everybody down,” he said. “That doesn’t work for us.”

Workers are evaluated but not ranked, he said. “We just look at it completely different.”

At its worst, ranking produces a toxic culture in which workers aim to make themselves look good and rivals look bad, not focusing on making the team succeed. Microsoft employees, for example, for many years made money on their own stock. But the stock price stopped surging.

“Then, the only way to make more money was to step over each other,” said Peter Cohan, a Massachusetts consultant in management and venture capital. “It twists the way that people behave.”

A forced ranking system can be unfair. What if all team members are competent? What if the difference between the best and the worst is marginal? What if different managers judge differently or — even worse — play favorites? And what about people who have different strengths?

“You need a balance of skills and motivations,” said Juergen Meyer, Atlanta-based principal in UHY Advisors, tax and business consultants.

“You need natural leaders of a team, but you also need people doing the work.”

Different strengths are also hard to rank, he said. “It’s comparing apples and oranges.”

What’s more, forced ranking can be expensive. Companies could be cutting people they’ve already spent a lot of money hiring and training, said Deb Keary, vice president of human resources for the Society of Human Resources Management, an association that represents about 258,000 HR professionals.

“If you are trimming your workforce down or replacing people, you’ve got a big expense there,” Keary said.

Kanell writes for the Atlanta Journal-Constitution/McClatchy.