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Forced-Ranking Systems in Performance Management

Many talent managers need some level of differentiation within their performance management systems to compare performance data among peers.

September 13, 2007
Related Topics: Technology, Diversity Measurement

Many talent managers need some level of differentiation within their performance management systems to compare performance data among peers. The common solution, forced-ranking systems, has been a highly used — and highly controversial — instrument that assigns an individual rank to each employee within the context of the department or organization.

Major U.S. corporations and their executives have invested heavily in strategies to create a high-performance organization, and the use of employee appraisal systems has been a key mechanism for monitoring performance within these programs. Almost every major Fortune 2000 company has used some form of a performance-appraisal system where people are evaluated annually on goal attainment.

Standard performance-appraisal systems basically compare individual levels of achievement against the goals and objectives that were set. One of the major concerns for executives and HR managers, however, is building differentiation into the system to more accurately capture relative performance data compared with peers.

According to Corporate University Xchange research, the use of forced ranking has been a highly used and controversial instrument for introducing this differentiation into the system because it assigns an individual rank to each employee within the context of the department or organization.

In fact, according to a Drake University study, as many as a quarter of the Fortune 500 companies might use some type of performance management system built around the principle for forced rankings.

What is Forced Ranking?

Forced ranking, also known as forced distribution, is essentially a performance management mechanism that requires a ranking of all employees to identify the relative performance of each one. Forced ranking’s objective is to employ only A players, therefore, B and C players must be coached to become A players or moved into other jobs where they can be A players. Employees who are unable to make this transition might be fired. In many cases, there is a required turnover of the lowest-performing group of employees each year.

Typically, when forced-ranking systems are applied, strict percentages (such as top 20 percent, vital 70 percent and bottom 10 percent) are set in a standard bell-curve model to slot the employees as either A, B or C players.

Ranking is Honest

Strategy advocates cite numerous reasons for including forced ranking as a mechanism to develop a high-performance organization such as:

• Rewarding the high performers.

• Promoting based on merit.

• Speaking and interacting honestly with employees.

• Promoting a culture based on achievement.

• Eliminating the worst performers.

Recognizing individual performance is thought to be the only honest approach because team members already will be aware of who the low performers are — the ranking results should not surprise them. A forced-ranking system based on performance also shows organizational commitment to helping those who achieve and promoting the development of an organizational culture that does the same.

Another argument for forced-ranking systems is that they act as a succession planning tool, allowing organizations to replenish the supply of qualified talent. Proponents say because it is based on merit, the forced-ranking approach is superior to the traditional succession planning process in which executives groom backup candidates for key management positions.

Where’s the Love?

In contrast to business arguments for the practice, detractors of the forced-ranking strategy say it has a variety of critical defects. For example, organizations that implement forced-ranking systems are likely to degrade team efforts and encourage an “each person for himself/herself” attitude.

Another critique of forced-ranking systems resides in the erosion of social capital, which refers to the combination of skills (the ability to help), teamwork (the ability to work together) and the zeal to help. Many think the constant pressure of a forced-ranking system can decrease morale, thereby negatively affecting productivity, retention and innovation.

Another key ethical concern that arises in this process revolves around using a system whose basis for being the best way to create a high-performance organization is to fire a certain number of underachievers (although the forced-ranking process does not necessarily dictate that C-graded employees need to leave the organization).

Just the legal ramifications of inappropriately using termination quota systems have caused some organizations to abandon the use of forced ranking. There also have been several documented cases of class-action lawsuits whose exclusive focus was the validity of forced-distribution appraisal systems, which has made many organizations rethink the use of the tool.

Key Implementation Considerations

If your organization is considering a performance-rating system based on forced ranking, careful implementation consideration is vital, not only to assure effectiveness but also to assess program strengths and weaknesses, as well as to redress weaknesses. Organizations must spend a considerable amount of time upfront addressing the following questions during the formative stages of the implementation process:

Time Frame: Should forced-ranking systems be implemented year after year or only during key company transition events (i.e., mergers, acquisitions and divestitures)?

Organizational Level: How far in the organization should the ranking process extend? Should it include only top leadership positions or all people in management?

Confidentiality: To what extent should a company publicize the fact that it is adopting a forced-ranking system? Should rankings be shared internally?

Distribution Curve: Should your organization stick with a normal bell-shaped distribution curve of the top 20 percent, middle 70 percent and bottom 10 percent, or would you enforce the system in which employees would be given the grade, regardless of percentage quotas?

Outcomes and Consequences: How does the organization determine the evaluation standards of A, B and C players? What happens once the process is complete? What does the organization do with those identified as C players? How are the A and B players rewarded and developed?

It is also important to consider that the primary strength of this process is the standardization of the evaluation criteria applied to all individuals (at the requisite level) across all organizational units. Therefore, any implementation plan should incorporate such a deliverable as part of the process.

The evidence is certainly mixed concerning the use of forced ranking as an effective mechanism for performance management. The differing beliefs in regard to the use of these systems stem from a fundamental disagreement about effective measuring criteria and the severity of actions taken to address low performance.

Although proponents recognize the value of honesty and a high-performing culture, concerns remain about the impact on culture when low performers are regularly removed.

Forced-ranking systems are not a panacea and should be used in conjunction with other performance management and career development tools such as performance appraisals, training, mentoring/coaching, job postings, succession planning and tuition assistance.

To demonstrate that forced-ranking systems truly are a positive force to encourage performance (rather than simply punish low performance), these tools must be implemented together in a truly supportive structure that recognizes and rewards those who strive to perform.

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