Stack Ranking: Morale Killer or Necessity?

In the past few weeks, the practice of stack ranking has moved out of the frying pan and into the fire. First, Microsoft finally ditches it after decades of complaints, only for Yahoo to pick it up to eliminate its underperforming employees.

Stack or “forced ranking” is a review practice of placing employees in categories of high performing, middle performing and underperforming. The system is used differently depending on the company, but in the case of GE and Microsoft, managers had a quota for each category: there could only be a certain number of high performers, a certain number at the next level and so on. Ex-employees have said this leads to a toxic competitive environment where talented individuals don’t want to collaborate for fear of lower rankings. When the news broke that Microsoft abolished the practice, the Internet rejoiced.

The issue is more complicated than the idea that managers are bad and employees are victims. Performance review is a highly nebulous system with high stakes that companies have attempted over and over again to get right, according to Cliff Stevenson of research organization the Institute for Corporate Productivity, or i4cp.

“The major issue has been the compensation side of it: Without having some sort of system in place to give ranking to employees, it makes it harder for organizations to distribute funds for merit pay, bonuses, increases,” Stevenson said.

While most positions have base pay, the top performers will get the extra 3 to 5 percent increase due to their results. Without the ranking system, companies don’t have the information to implement that pay-for-performance philosophy.

“If you can give people a score along some sort of criteria across all employees, it gives you some data points on performance that allow you to make decisions,” Stevenson said. In an era when datification is necessary for ever aspect of a business model, Stevenson said this system is very tough to get rid of or even adjust.

The other primary cause for stacked ranking is the need to institute a lean workforce.

“A forced ranked distribution system is particularly attractive for large corporations with significant human resources overhead and the need to keep compensation under control,” said Mary Hunt, an organizational psychologist. “Management then has a clear-cut group of low-rated employees if they are looking to reduce staffing.”

Research has shown stack ranking is affecting employees’ motivation and their decision to stay with a company, according to i4cp.

“Seventy-seven percent of employees say they found the system to be unfair. What the perfect system is I don’t know, but certainly what we have now isn’t felt to be fair,” Stevenson said, “and lower-rated employees have a higher turnover rate.”

Some managers have defended the practice by claiming that lower-rated employees may need a different type of project or further development, so in stack ranking they are being assisted if they are getting low marks, in the same way that students with a failing grade will get the extra attention and help they need to succeed. If that’s the case, Stevenson said the issue may originate not in the system itself but in the lack of communication on the part of management.

“I think some of the issue has been in the perception. If it’s meant to be a measure of who needs development, if that’s not the way it’s coming across to employees.”

Some Microsoft employees who have written about the system agree that when correctly explained, the ranking is not such a terrible thing. John Ludwig, a Microsoft employee from 1988 to 1999, said that as long as managers were honest about the system, explaining it well, it worked.

“The people at the bottom of the stack rank are not bad people, they are just the least effective people on the team. It could be a bad fit for them. Or maybe they had other things going on in their life this year that hampered their effectiveness. … And some part (not all) of compensation will be tied to effectiveness. That seems pretty fair to me,” Ludwig writes on his blog.

Ludwig argues that while stack ranking causes some stress around the review season, it never immobilized the organization. He compares it to a school system of GPA vs. class standing. A common defense of stack ranking is that people are used to it from educational systems, but there are some differences.

“With an ABCD rating in schools, there are no limits to how many A’s can be achieved — everyone can strive for the top and know that if they do well they can achieve an A,” Hunt said. With a performance ranking system, some employees will receive a lower ranking even if they do “A” level work, which can negatively impact their motivation to perform their best.

Another lingering issue with Ludwig’s assessment of stack ranking is that it still depends heavily on the manager’s honesty. Another Microsoft employee, Ben Thompson, writes that the lack of accountability is especially destructive in performance reviews.

“When a product succeeds or fails, it is clear who is at fault — it’s the division leader and his lieutenants. In a functional organization, it’s much less clear cut, and much easier to pass the blame. Moving to a less accountable organizational structure while simultaneously blurring the individual compensation system may not be the best idea, particularly in an organization that is already highly political,” Thompson writes on his blog.

Stevenson and his colleagues published a report about performance review highlighting some companies like Adobe and REI that have moved away from merit-ranking pay.

“They haven’t seen a dip in performance measures and all have seen slight increase in engagement and increase in satisfaction in [the] performance management process,” Stevenson said.

“There’s a broader philosophical notion that humankind falls on a bell curve. There’s no reason to assume that’s true — in fact there’s research that shows it’s more of a ski slope with lots of employees in the middle and a few higher performers,” Stevenson said.

Mary Camille Izlar is an editorial intern at Talent Management magazine. She can be reached at editor@talentmgt.com.