Every Monday, we do a “legal update” in our office where our team discusses a current legal change, or we refresh ourselves on existing laws.  Recently, Brita brought in an article from Bloomberg Businessweek announcing that Microsoft was dumping their stack ranking evaluation system (also known as rank and yank).

A little history might be good here before I go further.  Forced Ranking systems aren’t new.  They were made popular back in the 1980’s by Jack Welch when he was CEO of GE and he implemented them there.  The concept is simple, using a bell curve, you rank your employees.  10% are identified as top performers, 80% are put in the middle, and the bottom 10% are identified as non-performers and removed from the organization.

The issue with these systems is that they don’t typically include any specific criteria for what makes a top employee (or a low performer for that matter).  In fact, there are plenty of stories from organizations that used these systems where the decisions were made by teams of managers who posted names of employees on Post it notes on the wall to determine their ranking.  As a result there are lots of opportunities for subjectivity and discrimination claims.  But that’s only the tip of the iceberg.  Imagine working in a department of ten people knowing that one of you would be fired each year.  What impact do you think that might have on teamwork and employee engagement?  Consider this, if you thought you were close to the bottom and had an opportunity to make another co-worker look bad, would you do it?

Many large employers were inspired by Welsh at GE and switched to this system in the early 2000’s and dropped them just as quickly.  Ford Motor Company had such a system.  In their system, all employees were rated as A’s, B’s or C’s in a 10%/80%/10% ratio.  If an employee received two C rankings, he/she was discharged.   Shortly thereafter, a class action lawsuit was filed stating that Ford’s system actively discriminated against older employees.   Ford dropped their program in July of 2001 after the lawsuit was filed in April of that year.  They fired their CEO (Jacques Nasser) who had implemented the system in October and then settled the class action lawsuit for $10.5 million (Siegel V. Ford Motor 2001) in early 2002.  Other large employers were sued over their ranking systems as well during this same timeframe. (Jones v Goodyear, 2002 and Feltman v. Capital One Service, 2002)

This just sounds like a really bad idea, right?  So imagine my surprise to find out that a large organization like Microsoft would still be using a system like this.  Maybe that’s why journalist Kurt Eichenwald referred to the time that Microsoft used this as their “Lost Decade” in his article titled “How Microsoft Lost its Mojo:  Steve Ballmer and Corporate America’s Most Spectacular Decline.”  Even GE dropped the system that Welch continues to promote.

Certainly employees need feedback and organizations need to properly address and/or reward employees based on their performance.  What we advocate at HRM is to define the goals each individual is responsible for achieving as well as behavioral examples of the way we want those goals achieved.  Effective evaluation systems aren’t impossible; they just take time and expertise to develop.

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