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Should Forced Ranking Be Part Of Our Performance Appraisal Procedure?

First, a definition. Forced ranking is a recently developed management procedure that requires managers to assign employees into predetermined groups according to their performance, potential, and promot-ability.

General Electric, the company best known for the procedure, sorts employees into three groups: a top 20 percent on whom rewards, promotions, and stock options are showered; a high-performing middle 70 percent with good futures: and a bottom 10 percent. The bottom 10 percent is unlikely to stay.

GE’s not alone. Ranking employees is an everyday practice at highly admired companies such as Microsoft, Cisco Systems, Hewlett-Packard, EDS, PepsiCo, and Sun Microsystems. Sun’s performance appraisal system parallels GE’s. Hewlett-Packard uses a one to five scale with 15 percent of employees receiving the highest grade and 5 percent receiving a rating of one. PepsiCo ranks workers with a quartiling approach; EDS uses quintiling.

What all these systems have in common is their requirement that managers, in addition to conducting conventional performance appraisals and evaluating how well people have performed against objectives, compare people against each other. Managers must place each person into one of a limited number of categories with a fixed percentage assigned to each one.

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Employee ranking—Jane is better than Bob but not as good as Charlie—has always been a feature of organizational life. What’s different now is that companies are formalizing these conversations. They are moving them away from casual exchanges around the water cooler into intense and highly structured meetings that sometimes last two days.

Critics of ranking systems charge that these forced-distribution schemes are subjective, unfair, and discriminatory. Forcing managers to assign a certain fixed percentage into a bottom group seems unfair, particularly when groups are small and are made up of people with unique skills and widely varying assignments. Deliberately culling the bottom of the herd flies in the face of a popular mythology that assumes that everyone is salvageable.

On one point at least, the procedure’s critics have it right: Forced ranking systems are certainly discriminatory. They discriminate against the dull and slothful in favor of the bright and energetic. But this discrimination is not only legal, it is mandatory if a company is going to prevail in a tough and competitive market. The arguments that the process is illegally discriminatory, however, seem specious: One suit alleges that ranking systems encourage the continuation of a good-oldboy network to the detriment of minorities and females; another puts forth the claim that as a result of companies’ concern with encouraging diversity, older white males take a disproportionate hit when the ranking game is played.

A lack of objectivity is another common complaint about ranking systems. But check out what objective actually means: ‘‘Uninfluenced by emotions or personal prejudices: an objective critic. Based on observable phenomena; presented factually: an objective appraisal.’’ Ranking systems serve to increase the objectivity of the employee review process by systematizing the complex job of assessing talent. A great benefit of forced ranking systems is that they clarify the criteria the organization uses to assess performance and potential and then force managers to focus on only those criteria in making their judgments.

Employee ranking requires tough decisions in an area where solid, quantitative, numerical data simply don’t exist, particularly when one is assessing the individual’s potential and promotability. The employee ranking process requires the exercise of honed managerial judgment in a situation where the data are always incomplete and often contradictory—the same managerial judgment that we applaud and reward when it is applied in other areas. But managers make tough decisions based on limited data all the time: which projects to fund, which to shelve, when to react swiftly to a competitor’s move, when to let time take its course. Just because the decision isn’t based on countable units doesn’t mean that the decision isn’t objective. Such highly valuable skills as sensitivity to nuance, or the ability to transform adversaries into allies, or the willingness to go the extra mile for a customer, can’t be reduced to a quantitative, numerical scheme.

Employee ranking is not the same as solving an algebra problem: It can’t be reduced to a mathematical algorithm. Hard decisions need to be made in organizations. The data are always imperfect. The forced ranking procedure helps managers make these hard decisions with intelligence and compassion.

Forced ranking’s apparent unfairness generates the most protests. The usual scenario presents a hapless manager forced to sit in judgment of his team of uniquely skilled organizational Green Berets, each one doing an excellent job, and to force-rank a portion of them into the company’s dunce category. But talent variations do exist, even among real Green Berets. Green Berets may well be the military’s best-of-breed, but some demonstrate more courage under fire than others do. Some have better insights about how an attack should be deployed, about which informants are actually double agents. So while everyone in a small department may indeed play a unique role well, some play their roles better than others and offer more potential to play bigger and more challenging roles.

What is never put forth in these fatuous ‘‘Green Beret’’ objections is the equally likely case—the team in question consists of a bunch of organizational Keystone Kops. Now the forced ranking system unfairly compels the manager to place an arbitrary number of dimwits into a superior performance category.

Forced ranking’s fairness is most apparent when layoffs become a necessity. When economic necessity mandates reductions in force, is it fair for companies to throw out solid performers and retain marginal ones? And if companies do that, isn’t that unfair to their customers? And if companies treat their customers unfairly, isn’t the job security of the remaining workers thereby unfairly jeopardized? When layoffs are unavoidable, ranking is the fairest way to proceed.

Employee ranking systems have a worthy goal: to recognize and retain top performers, while improving or removing bottom players. These unpopular systems compel reluctant managers to identify that small minority of staff who make a disproportionate contribution to the organization’s success, and to finger those whose departure would likely be beneficial. They guard against spineless managers who are afraid to jettison their laggards.

But too many managers suffer compassion glut. They hate making these tough judgments, preferring to live in a Lake Wobegon world where all the children are above average. A forced ranking procedure compels managers to inform employees honestly about the perceived quality of their work and their long-term potential with the organization. Without the rigor of a forced approach, too many managers continue to push along poor performers with deceptively inflated reviews.