Forced Ranking System

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Forced Ranking Behind the Scenes Published in Across the Board Magazine December 2002 Issue By Dick Grote FORCED RANKING: BEHIND THE SCENES “CHARLIE’S BETTER THAN SAM BUT NOT AS GOOD AS MARY.” In a nutshell, that’s the operating dynamic behind the most controversial and under appreciated management practice today — forced ranking. Companies that use a forced ranking system require their managers to assign employees into different categories based on both past performance and leadership potent
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    Forced Ranking Behind the Scenes Published in Across the Board  MagazineDecember 2002 Issue   By Dick Grote  F ORCED R ANKING :   B EHIND THE S CENES   Page 2 C OPYRIGHT  © 2002 Dick Grote   “C HARLIE ’ S B ETTER THAN S AM BUT N OT AS G OOD AS M ARY .” In a nutshell, that’s the operating dynamic behind the most controversial and under appreciatedmanagement practice today —forced ranking.Companies that use a forced ranking system require their managers to assign employees intodifferent categories based on both past performance and leadership potential. General Electric,the company best known for the procedure, sorts employees into three groups: a top 20%onwhom rewards, promotions and stock options are showered, a “high performing middle” 70%withgood futures, and a bottom 10%. The bottom 10 %are not likely to stay.“A company that bets its future on its people,” GE’s former CEO Jack Welch wrote in his finalstockholders’ letter, “must remove that lower 10 percent, and keep removing it every year —always raising the bar of performance and increasing the quality of its leadership.”GE’s not alone. Ranking employees is everyday practice at highly admired companies likeMicrosoft, Cisco Systems, Hewlett Packard, and Sun Microsystems. Sun’s system parallels GE: 20%are “superior,” 70%are “Sun Standard” and 10%are “under performing.” Hewlett-Packard uses a1-5 scale with 15%receiving the best grade of 5 and 5%receiving 1’s. Microsoft uses a 2.5-5scale. PepsiCo uses a quartiling approach where managers allocate their troops into one of fourquartiles; EDS uses quintiling.What all these systems have in common is their requirement that managers, in addition toevaluating how well Anita has met her objectives and how competently Harry performed his jobdescription duties, rank people against each other. Managers must place each person into one ofa limited number of categories with a fixed percentage assigned to each bin.At companies that don’t rank employees, almost every worker can come away from aperformance appraisal discussionfeeling, like the children of LakeWoebegone, that he or she is aboveaverage, particularly if a faint-hearted manager sets his standards low enough that the even thevillage idiot can exceed them. But with a forced-ranking system, managers are required to bell-curve the troops. “F ORCED RANKING IS EVERY DAY PRACTISE AT HIGHLYADMIRED COMPANIES ”  F ORCED R ANKING :   B EHIND THE S CENES   Page 3 C OPYRIGHT  © 2002 Dick Grote   F ORCED R ANKING OR F ORCED D ISTRIBUTION ? In most companies that use the procedure, the forced ranking sessions are separate from thecompany’s performance appraisal system. “Performance appraisal” is the important and well-established annual process that, done right, helps every member of the organization understandhow his or per performance contributes to the achievement of the organization’s mission.Performance appraisal educates all members of the company team about the competencies thatare important to the company as a whole and in their individual job. It provides for theidentification of their key job responsibilities and identifies the standards and measures that theboss will use to assess the subordinate’s performance. It encourages setting important andmeaningful goals and identifies the outcomes those goals will be expected to produce.A company’s performance appraisal   rules may provide that only a certain percentage of peoplecan be assigned into the various final rating categories. If they do, that’s an example of “forceddistribution.” It’s a person-to-standard  comparison. Forced ranking is a different kettle of fish.Instead of a person-to-standard comparison, it’s person-to-person  .There are several other differences between the two procedures. First, while almost everyorganization bigger than Joe’s Bar & Grill has some form of performance appraisal mechanism,only the big boys tend to have a forced ranking system. A surprisingly large number of companiesuse forced ranking, however, and an even larger number are moving toward implementing theprocess. Fortune  estimates that a quarter of Fortune 500 companies have instituted forcedranking programs.A second difference between performance appraisal and forced ranking systems is thatperformance appraisal programs typically affect everyone in the company —nobody’s immune toreceiving an annual review —while forced ranking processes usually only examine people at thetop of the organization. While it’s critical that every member of the company know what’sexpected of him and set meaningful goals, the payoff for assigning talent into A, B and C pools isgreatest with those who have the greatest impact on the corporation’s overall success. In otherwords, you earn the right to be involved in forced ranking by making your way to the top.Finally, performance appraisal necessarily focuses on the past. Just how well did Sandy do inachieving her objectives over the past 12 months. Forced ranking, on the other hand, focusesexclusively on the future. The issue for assessment in forced ranking sessions is the amount ofstretch the person has to lead the organization into the future.  F ORCED R ANKING :   B EHIND THE S CENES   Page 4 C OPYRIGHT  © 2002 Dick Grote   T HE C RITICS ARE W RONG   Critics of the procedure argue that forced ranking is discriminatory, subjective, divisive,arbitrary, and unfair. It’s not true.Ford, Conoco and Microsoft havebeen hit with class action suitscharging that their ranking systemswere used to illegally favor some employees over others. Certainly the process is discriminatory:it discriminates in favor of the talented and energetic and against the lazy and dull. But thatform of discrimination is not yet illegal.It’s a human tendency for people to believe that they’re better than they actually are. Workersranked at the bottom will never like it and are unlikely to accept it. Everyone in an organizationwants the answer to the question, “Where do I stand?” Forced ranking gives them the answer.Unfortunately, some people will not like the answer they get. If they are members of a protectedclass they can easily transform their disappointment into an accusation that the poor ranking wasactually a function of their age or color or sex, and not on their poor performance and lacklusterpotential.But the argument that forced ranking is illegally discriminatory seems specious. On one hand, theMicrosoft suit alleges that the system, by bolstering a good-old-boy mentality, encourages whitemanagers to favor their white friends against the organization’s black employees. The Ford suit,conversely, argues the opposite. There the middle-aged white men suing Ford argue that thecompany’s diversity push has forced managers to disproportionately assign white men to thebottom 10%. And in Conoco’s unusual suit the American plaintiffs claimed citizenshipdiscrimination, arguing that the company illegally favored Britons.It’s unlikely that the discrimination charges will stick. One of the Microsoft lawsuits wasdismissed May 9,2001, in a Seattle federal court. In dismissing the suit, the judge stated, “arational jury would not conclude that Microsoft’s practices were discriminatory against older andAfrican-American workers.” The Ford suit was settled in March 2002. And employment-at-will isstill a valid legal principle.But what if a company’s forced ranking procedure, honestly and objectively done, reveals thatthe blacks or women or disabled employees just aren’t as talented as the white ones? Shouldthey do what some Harvard professors are said to do and award A’s to all the blacks, just to keepthem from squawking? F ORCED RANKING ’ S PAYOFF IS GREATEST AT THE TOPOF THE ORGANIZATION .
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