Forced ranking systems, made famous decades ago by former General Electric CEO Jack Welch, have come in for some hits over the past few months. Welch used this system to great effect and accolades when he slimmed down GE and drove value creation by forcing a certain percentage of employees and manager into high (20% of all performers), medium (70% of all performers) and low (10% of all performers) performance rankings, then often fired the members of that bottom 10%.
Force ranking systems have wandered back into the spotlight thanks to an article running in the latest issue of Vanity Fair magazine. The article claims that Microsoft Corp. has lost its edge and lays a good portion of the blame on the company's stacked ranking system that, like GE's force ranking system, places a certain percentage of employees and managers into those high/medium/low performance categories following each semi-annual performance review. The Vanity Fair article charges that, instead of pushing employees to higher performance, the system pitted employees against one another and caused them to spend more time protecting their own prospects rather than focusing on innovation and collaboration.
Although many companies still rely on forced ranking systems, their use has declined since their GE heyday. Just how many companies use these systems is a bit unclear. According to a survey conducted by the Institute for Corporate Productivity and released earlier this year, the use of forced ranking systems has declined from 49% of all companies in 2009 to 14% in 2011. Meanwhile, the Wall Street Journal estimates that 60% of the Fortune 500 companies still use some form of this system even if they do not call it forced ranking.
Although some might trace any decline in forced ranking to the rise of collaboration, Financial Times columnist Andrew Hill calls the system a relic that has more disadvantages than advantages. Hill argues that such systems can lead to infighting among the employee ranks that defeats collaboration and can lead to a rash of short-term thinking as employees focus on their next performance review instead of the larger picture and the company's long-term goals.
Moreover, a 2010 study conducted by Iwan Barankay, a management professor at the Wharton School at the University of Pennsylvania, found that ranking employees by performance and communicating that ranking to those employees was demotivating to both high and low performers. The study found that high performers can become complacent and see no reason to strive for more because they are already at the top of the heap. Meanwhile, lower performers tend to lose heart and give up on trying to improve, according to the study.
Finally, a manager who had to manage using a forced ranking system found one main benefit to the system and one key drawback. On the positive side, forced ranking created pressure on managers to confront performance problems among their employees and to have honest conversations about that performance. However, forcing employees into specific performance categories led to unhappiness among the ranks and arguments that the system was not fair to everyone.
While these systems may work for some organizations, sometimes an old saying is extremely pertinent: One size doesn't fit all.