Stack Ranking Employees Works
November 17, 2008
Now more than ever, organizations need to optimize their workforce in today’s economic climate of falling revenues and shrinking profits. Companies have long used stack-ranking to manage their people and identify employees to manage out or up, GE for example categorizes their workers as being top, middle and low performers with 20% high, 70% middle, and 10% low performer distribution. They regularly manage out the bottom 10%. Stack ranking is a powerful tool, but does it work?
Professor of management at Drake University in Iowa, Steve Scullen, found that forced ranking, including the firing of the bottom 5% or 10%, results in an impressive 16% productivity improvement.
Companies that are able to quickly compare the performance of their people to find high and low performers have an advantage over those who cannot. Low performers actually cost the company money, so when a business manages them out, they see an immediate benefit. The opportunity cost is even higher. If high performers contribute about 5 times as much as low performers, as our friend and thought leader Dr. Peter Cappelli has found in his research, the opportunity costs is huge. Imagine how much more value the company could generate if they could replace low performers with high performers.
These kinds of optimizations are on everyone’s mind in todays slowing economic environment. SuccessFactors decided to tailor a solution for optimizing the workforce by building a tool that allows managers to stack rank their employees.
Of course stack ranking isn’t just about managing out low performers, but it is also about ensuring that you are able to find and cultivate your best talent. Those top performers who contribute 5 times as much as the low performers should be rewarded, leaders should be identified and trained. Competencies should be compared and managed across teams to ensure that the right capabilities are in place. Stack ranking is a great tool not only for optimizing your workforce, but also for building it.
Already rich with performance management data, the SuccessFactors Stank Ranker helps managers to:
- Visually Rank Talent – Instantly identify your top-ranked players so that you can optimize your team by motivating and cultivating your best people. Give limited rewards to top employees that deserve extra recognition, or quickly identify low performers to let go when faced with tough layoff decisions.
- Go Beyond Performance Reviews –Stack Ranker expands the formal review process by letting you capture new characteristics for a more holistic assessment. For example, you can incorporate factors like criticality of the role into ranking or other criteria to serve as tie breakers.
- Assess Everyone at Once – Quickly assess your entire team across critical competencies and criteria in real time — all in one place. Side-by-side rating promotes more accurate relative assessments.
Stack Ranker was designed to help companies act now. Organizations simply cannot afford to carry the dead weight of low performers in these uncertain times. Furthermore, they need to move quickly or they will be outflanked by their competitors. Tools like Stack Ranker are critical to succeeding in today’s environment.
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4 Responses to “Stack Ranking Employees Works”
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The implication of stack ranking is that your company always has 5-10% poor perfformers. If this is the case you are doing a lousy job of recruiting and selecting, and of managing performance as an on-going process.
It alos implies that you can find better employees than the bottom of your current crop. Why didn’t you hire these better performers in the first place?
As you get rid of the bottom %, does the group above them tend to drop to the bottom so they get fired the next time? This doesn’t say much for how well you manage your employees to encourage and inspire good performance.
Stuart Sobel
HR Leader
Experienced HR manager and consultant
I vote “NO” regarding stack-ranking, and here is my rationale.
Let’s think about two theoretical managers. Manager A, is a hyper-rational, left-brained type who doesn’t understand his own emotions, much less those of the people around him. People, to Manager A, are objects to be manipulated–pieces on a chess board.
Manager B, on the other hand, balances left brain rationality with right brain intuition and empathy. Manager B has a profound understanding of the complexities of human nature and knows that human beings come equipped with five motivational hot buttons that drive high performance.
I got my MBA from the University of Chicago, a very left brained, analytical place that reduces human beings to numbers in an equation, so I have met lots of A-type managers. Fortunately, I have also met many B-types too, many of whom have been spectacularly successful. Most of corporate America, I’m afraid, is run by A-types, which is probably why only 31% of employees give a darn about their work (Gallup).
Manager A, being hyper-rational, does not understand that human beings come equipped with a sophisticated motivational mechanism consisting of 5 hot buttons. Pressing a hot button, by the way, creates intrinsic rewards that contribute to an employee’s emotional paycheck (all forms of reward, biologists have discovered, are fundamentally emotional in nature). If a manager can press all five of these hot buttons, employees will experience maximum compensation (maximum intrinsic reward) and perform at their theoretical best. In this case, the manager would harvest 100% of the motivational energy of the workforce.
Manager A doesn’t understand any of this, because he is emotionally disabled, or emotionally dyslexic. He can only look at performance numbers and cull the low performers. Manager A, because he utterly fails as a leader, only harvests 30% of the potential energy of his workforce. His leadership score is therefore a solid “F”. The workgroup could be three times more productive with a manager who had a balanced understanding of human nature and was skilled in pressing the motivational hot buttons.
Manager A, because he is clueless regarding leadership and motivation, defaults to using fear and money to get a modicum of productivity from the workforce. Fear, however, is an ineffective hot button. It creates negative emotions that reduce the emotional paycheck. Fear also triggers the amygdala (the brain’s threat avoidance system) and unleashes harmful, ballistic emotions in the workplace. Fear creates deductions from everyone’s emotional paycheck and causes people with a choice (high performers) to escape the toxic work climate created by manager A. The high performers state in their exit interviews, “You couldn’t pay me enough money to work under these conditions. Life is short, so why would I waste it working for a guy like Manager A.” The continual churn caused by culling of low performers and loss of key talent creates a tremendous financial drain on Manager A’s company and it soon files for Chapter 11.
In this scenario, it was clearly Manager A who needed to be stacked and culled because he did not understand the motivational engine that propels high achievement. Manager A just assumed that every employee should be self motivated, and if they aren’t self motivated they get culled. This lazy, arrogant perspective denies the role of leadership in motivating the troops, and denies the very existence of the motivational engine. Simply put, it is dysfunctional.
Now let’s consider Manager B, the emotionally intelligent one. Manager B knows that high performance must be earned, not demanded. Monetary pay and benefits will purchase grudging compliance from employees, but it will not purchase their enthusiastic and enterprising participation in the business.
Manager B knows that step one in building a high-performance organization involves creating bonds, or linkages, between the employees themselves, and between managers and employees. These bonds create conduits for energy and expertise to flow to where they are most needed in the organization. These bonds are equivalent to connecting separate computers into a powerful intranet.
These linkages are not easy to build because human beings are not quick to trust. Linkages are built painstakingly, one-by-one by listening to employees, investing in employees and mentoring employees. Slowly, over time, a rag-tag collection of self-interested individuals can be bound together into something formidable, a superorganism, a group of human beings who think and act as one.
Manager B is using an approach that aligns with the deep architecture of human nature. This architecture is ancient. We inherited it from our ice age ancestors who hunted in small, intensely-bonded groups without managers, bureaucracies, policy manuals or other artificial systems of control. We can’t physically go back to our lost ice-age habitat, but we can incorporate elements of our lost lifestyle to make the modern workplace more productive, rewarding and human-friendly. Manager B calls this better-way “natural management.”
Human beings, you see, are designed to be self managing, self organizing and self motivated without the need for a thick rule book or an army of overseers when they are embedded within committed and tightly-bonded workgroups. Companies that recreate this sort of natural, low-bureaucracy, low-oversight ecosystem, unleash human potential instead of stifling it.
Manager B, as you can see, did not focus on profits or satisfying the customer. Manager B focused on creating a workplace climate that was so excitiing and motivating that employees looked forward to coming to work in the morning. Manager B knew that by creating an emotionally-rewarding workplace (by pressing the hot buttons), she would make lots of money and have lots of satisfied customers.
So what is the outcome of Manager B’s contrarian approach. First of all, she harvested 100% of the motivational energy of her employees. Employees who didn’t fit into this high-energy, high-commitment workplace stuck out like sore thumbs because they had rejected membership into B’s workplace tribe. Using Jim Collin’s analogy of a bus, these folks either jumped from the bus willingly, or got ejected by the other passengers.
So, in my opinion, culling is a tool used by lazy, emotionally-deficient managers who do not understand the subtleties of human nature. Enlightened managers balance cool rationality with a deep understanding of the motivational forces that drive human achievement. The best organizations don’t need to cull because this process occurs naturally and organically as the corporate tribe rejects the folks that don’t buy into their intense, high-performance culture.
Companies on Fortune Magazine’s “100 Best Places to Work” list showed average shareholder returns of 14.5% over the past seven years according to Wharton finance professor Alex Edmans. This compared to average returns of just 6% for a randomly-selected control group. How many of the “100 Best” companies do you think use stack ranking? Not many, I suspect.
Best,
Paul Herr
P.S. If you’d like to explore this “natural management” concept in more detail, check out http://www.primalmanagement.com. I am recruiting management revolutionaries to turn traditional, bureaucratic, impersonal, hyper-rational management on its head!
Viva la revolucion!
In intent, the forced ranking system (or the “20-70-10 system” and “rank-and-yank system” in Jack Welch/GE terminology) is an excellent method for rewarding top performers and setting specific deadlines for improvement for poor performance. Despite this appeal, the system has several drawbacks.
Most organisations that implement forced ranking systems tend to experience a lot of resentment to the system— especially about the requirement that 10% of the people be ‘purged’ or ‘yanked’ (poor choice of words) out of the organisation every year. The basic idea behind this 10% distribution is that the people here probably don’t fit in the context of the current endeavours of the organisation or have established a pattern of contributing little in the recent past. By forcing an employee into this 10% category, a manager is essentially doing him/her a favour by hinting that the person take up a job that fits better with his/her interests and capabilities, whether in another sub-organisation within the company or in a different company altogether. In practice, though, people in the 10% category are usually terminated automatically only if they have been in the 10% category in two consecutive ranking cycles.
Quite often, the forced ranking system is poorly implemented. Sometimes, the upper-level management simply ‘copy’ the system because they might simply adore Jack Welch and the transformation he brought about at General Electric. Successful implementation of forced ranking requires a thorough organisational culture and a framework of managerial practices. Three of these essential practices are: (1) a great recruiting, mentoring and retaining system that develops a great talent pool to diminish the efforts of losing 10% of the people every year, (2) an active system of performance feedback and recognition that the company’s leaders need to tirelessly advocate, and, (3) a management process that sets clear expectations for the performance of people and ‘measures’ them against these expectations. Without these initiatives in place, the forced ranking system boils down to a mere popularity contest.
I wrote about stack ranking in my Top ten things wrong with Performance Reviews. Stack ranking has way too many downsides. I do think your tool is best suited for a lay-off though versus line-item cuts like many companies are doing.
http://grandmaslaw.com/?p=44