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Forced ranking system a poison in the corporate lifeblood

Around the turn of the last century, I heard Jack Welch recount how he had visited a clothing store on New York's Fifth Avenue to buy a sweater.

A sales manager approached the then-boss of General Electric Co., said he was a fan, and in an embarrassed whisper, sought his advice.

Was it essential to get rid of the worst-performing 10 per cent of his staff every year, even though his own team consisted of just three people?

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"Of course," Mr. Welch replied breezily.

Bracing certainty was - and still is - the former GE chief's stock-in-trade. I also once saw him frighten a group of business students by pointing out that they could surely all identify their worst-performing classmates.

In business, he believed, it was just "false kindness" to keep laggards on into their 50s, only then to sack them all.

Mr. Welch calls the bell curve used to illustrate his system a "vitality curve," making it sound like an energy diet. I had assumed that over the past decade, companies had tested his old certainties, found them wanting and driven a stake through the heart of such forced ranking.

I was wrong. For the latest edition of Vanity Fair magazine, Kurt Eichenwald analysed Microsoft Corp.'s "lost decade" and pinned some of the blame for the technology group's loss of momentum on a similar-sounding system of "stack ranking."

He says the company divided teams according to a 20-70-10 ratio for six-monthly performance reviews, and used that curve to determine "promotions, bonuses, or just survival."

"Every current and former Microsoft employee I interviewed - every one - cited stack ranking as the most destructive process inside of Microsoft," writes Mr. Eichenwald.

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I've written here why I think career reviews are important. I won't recant. Most companies differentiate between staff and expect a distribution of performance.

But if appraisals have a bad name, it is partly due to the crude way such assessments are enforced.

Unite, the British trade union, is convinced not only that the vitality curve survives, but that it may now be more popular among British managers than with their U.S. counterparts.

Elsewhere, the system may have mellowed, as the returns from forced ranking diminish. GE no longer ranks people the Jack Welch way.

Microsoft (which would not comment on the Vanity Fair article) has in recent years simplified and amended its system based on employee feedback.

At consultancies, where highly ambitious, self-confident, strongly motivated, thick-skinned employees compete for primacy, "rank and yank" continues to thrive, though it has the more user-friendly title of "up or out."

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But the few benefits cited by fans - it creates all-star teams and continually raises the bar for performance - are far outweighed by the disadvantages, which are:

Horse-trading: Apart from the lobbying and politicking before any review, the threat of grading on the curve encourages managers to waste time trading favours with each other. The Vanity Fair article describes drawn-out meetings at which Microsoft team leaders would haggle over names, using white board grids and Post-it notes, until they had met their overall divisional targets.

Infighting: Far from increasing the desire of staff to work in high-performing teams, the vitality curve sucks the life out of collaboration. Why choose to work with the company's stars if they push you down into the bottom 10 per cent?

"Big fish" syndrome: No matter how large the group to which the curve is applied, companies end up comparing like with unlike, punishing those whose talents may simply be ill-matched to their current role, and rewarding staff who, in a better-performing team, would look less impressive.

Bad hiring: Managers no longer have the incentive to make their recruitment decisions work because they know they can move low performers on once a year.

Short-termism: "People planned their days and their years around the review, rather than around products," one software designer told Mr. Eichenwald. Most teams improve as they learn how to work together. Lack of continuity, or even the threat of it, impedes such advances.

Add the fact that it is costly (all those forced exits) and puts companies at risk of litigation (Ford Motor Co., Goodyear Tire and Sprint have all faced age discrimination suits linked to forced ranking), and the system looks like a relic.

Sorry, Jack. Where the ghost of the vitality curve lives on, exorcism is long overdue.

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