Forced Ranking A Good Thing for Business

Today’s business environment and the shortcomings of existing processes are prompting companies to rethink performance management. Now more than ever, it is critical to identify the top performers and distinguish them from the underperformers. Hence, many are revisiting an old tool: forced ranking.

Forced-ranking systems, established years ago at companies such as GE, are increasingly being reassessed. In a nutshell, these systems typically either align people in preset “buckets” (such as the top 20 percent, the middle 70 percent, and the low-performing 10 percent — the system used at GE) or rank them by performance from best to worst.

Below, we’ll address how organizations currently use forced rankings, consider how such rankings complement existing ways to manage performance, and identify which organizations, functions, and cultures find them most appropriate.

How effective is performance management?
One could argue that some form of performance appraisal has been in existence since the time of the Roman Empire. But it wasn’t until after World War II that formal approaches began to appear. Finally, in the 1980s, performance appraisal became performance management, and the process started to become more than just a once-a-year event and began to involve feedback, goal-setting, and self-reviews.

But does performance management work? Numerous industry surveys suggest that indeed it does not. In a recent Andersen survey, less than 5 percent of managers and employees alike were very satisfied with the process in place at their companies. Here are some reasons for the dissatisfaction:

• Managers have no training.

  
  

• Managers want to be liked.

  
  

• Setting goals is tough and imprecise.

  
  

• There are few consequences for notconducting performance reviews.

  
  

• Ratings are not consistent among raters.

  
  

• Leaders don’t set the example.

  
  

The Andersen survey also found that approximately half of HR professionals, 48 percent, said their systems were set up more than four years ago (with 40 percent dating back more than six years). This seems to suggest that these systems have not kept up with changes in the workplace.

Are we measuring the right things?
It has become obvious that performance appraisals are generally perceived as ineffective. For many organizations, forced ranking has put “teeth” back into the process. Forced ranking can be subdivided into two practices — Forced Distribution and Peer Ranking.

Forced Distribution aligns employees in accordance with pre-assigned performance-distribution percentages (e.g., exceeds expectations, meets expectations, does not meet expectations). It is a person-to-standard comparison.

Peer Ranking, on the other hand, ranks employee performance from best to worst. This is a person-to-person comparison (e.g., Amy is 1, Bill is 2, Sherry is 46, etc.).

Whether you are a friend or foe of forced ranking, this approach does not take away the responsibility of having a well-thought-out performance-management process. Since it is an overlay to the existing structure, ensure that the current process is effective by addressing these key points:

1. Are we measuring the right things?

   
   

2. Does the process produce consistent (repeatable) results between raters?

   
   

3. Does the process differentiate between high and low performers?

   
   

4. Do we identify clear consequences (positive or negative) for low or high performers?

   
   

The pros and cons
Proponents and advocates of forced ranking have strong opinions in favor of and against its use. Advocates of forced ranking state that the approach:

• Creates and sustains a high-performance culture. Involuntary turnover is managed by eliminating weak performers and retaining strong performers.

  
  

• Correlates with total return to shareholders. Recent research indicates a strong correlation between companies with strong performance-management processes and three- and five-year total shareholder returns. The research, just being published by Andersen, involves over 200 companies across a wide range of industries. It shows that companies that use individual criteria to assess the performance of employees and managers significantly outperform companies that focus primarily on measuring business-unit or overall company performance. Also, the study shows, companies whose managers are highly skilled at communicating business goals and objectives and providing structured feedback also enjoy higher total shareholder returns.

  
  

• Establishes well-defined consequences. Top-performing employees receive substantially larger rewards (i.e., base pay, bonus, options) than the average performers. Those falling at the lower end of the scale typically receive coaching and are on notice to improve performance.

  
  

• Makes performance management a corporate priority. With real consequences, performance management takes on renewed meaning.

  
  

• Lets employees know where they stand. One of the common complaints from employees is about the lack of feedback on their performance. Forced ranking sends a clear message as to how people stand, or fall.

  
  

Those who are opposed to forced ranking suggest that the process may:

• Be detrimental to morale. We want high-performing workplaces, yet we also want people to enjoy coming to work. Can we have both?

  
  

• Emphasize individual performance at the expense of team performance. Employees will be less willing to “pitch in” and help others. Completing individual assignments becomes more important.

  
  

• Promote competition. If employees are ranked, will there be less cooperation?

  
  

• Invite litigation. An important concern, this will be addressed later in the article.

  
  

Determining organization fit
Each organization, through careful analysis, will have to decide if this approach would be beneficial or detrimental for the company. The first two considerations should be:

1. What are your performance-management objectives?
2. What does your culture value?

1. What are your performance-management objectives?

   
   

   The table below, entitled “Is forced ranking right for you?” provides an overview of the process objectives that any performance-management system should address. Through the matrix, we determine whether forced ranking or peer review fully meets, partially meets, or does not meet the stated objectives.

   
   

   It is interesting to note that the first three objectives — alignment, objective, repeatable — do not automatically occur in any system, yet they are key to having an effective process. The remaining objectives — development, promotions, termination, pay, feedback, and workforce planning — begin to differentiate a forced-ranking approach from a non-directed (no rating guidelines) approach.

   
   

   It is possible to meet some of these objectives outside the actual performance-management process. For example, a financial-services firm recently implemented rigorous promotion criteria using a forced-ranking approach. Although there is no formal performance-management process in place, the forced-ranking criteria have become the foundation for officer selection.

   
   

2. What does your culture value?

   
   

   Not all cultures will support forced rankings. As the table below, entitled “What Does Your Culture Value,” illustrates, organizations on the right side of the scale will more easily embrace forced rankings. Alternatively, if your organization is toward the left end, resistance will be greater and it may take several years to implement, or it may simply be inconsistent with your business strategy. The five scales to examine are:

   
   

   Collectivism/Individualism — Forced ranking doesn’t work well for standing teams, where it is important to support each other. For example, a major European retailer’s strategy emphasizes teamwork on the sales floor. This enables the associates to fluidly move to where they are most needed. A forced-ranking system would have a detrimental effect on this goal. Alternatively, project teams, in which groups disband, re-form, and are results-oriented, find that forced ranking works extremely well. Product-design teams and professional service teams follow this model.

   
   

   Reliability/Flexibility — If quality is the number one issue, consider driving performance through quality improvements instead of forced ranking. A flexible structure applies to project-driven approaches where it is critical that individuals take the initiative. A global provider of information services gives flexibility to their sales staff to customize offerings and provide high-touch service, making a forced-ranking system a viable option.

   
   

   Activity/Results — Results-based organizations create increased accountability and use defined performance measures.

   
   

   Control/Empowerment — In a highly scripted, controlled environment, setting minimum criteria for performance may be the best approach. Call centers are a classic example of this — if you have 100 fully trained call center representatives, setting criteria (versus ranking each representative) may be a wiser approach. Organizations that value empowerment also encourage the flexibility and initiative necessary in a high-performance environment.

   
   

   Functional/Specialized — Forced ranking works best for companies with similar positions. It will be more difficult for those with hierarchical, functional structures, a large number of positions and titles, small departments, or a limited number of employees.

   
   

The legalese
The media has paid significant attention to the legal ramifications of a forced-ranking system. Individual discrimination, disparate impact, and class-action lawsuits have all been cited. What can you do to mitigate the risks? According to Tom Wilde, an employment attorney at Vedder Price, there is no substitute for preparation.

“Ensure that the process is clearly communicated and that training on setting performance goals, improvement plans, and feedback occurs,” says Wilde. He also encourages HR managers to work with their legal counsel to:

• Update policies and handbooks

  
  

• Update job descriptions

  
  

• Monitor performance evaluations and discipline for consistency

  
  

• Monitor and assess potential EEO problems

  
  

In the beginning
So where do you start?

• Take stock of your culture.

  
  

• Understand and identify decisions to be driven by the performance-management system.

  
  

• Determine if a forced-ranking overlay can apply to existing performance-management processes, or if redesign is necessary (remember the four key questions).

  
  

• Drive it through senior leadership.

  
  

Implementation doesn’t happen overnight, so assume that it is a multi-year process and plan accordingly.

Does it help you make decisions?
Is forced ranking right for every company? Probably not. As we’ve discussed, much depends on your organization’s strategy, structure, and culture. There may be alternatives, or a phased-in approach, that will be more successful.

The core issue is whether these processes provide the ability to make people and workforce decisions — who to develop, promote, redeploy, or terminate. In the end, these are the outcomes that move a process from administrative to strategic and make a difference to both individual and organizational performance.