Friday, February 22, 2013

Forced ranking: Doing it right, doing it wrong

General Electric CEO Jack Welch made the practice of "forced ranking" famous when his company championed it in the 1980s -- or maybe that would be infamous … but more on that later. What is forced ranking? It's the system where companies group employees into certain categories according to their performance. Welch's approach divided employees into three groups -- the top 20 percent, the middle 70 percent, and bottom 10 percent.

The purpose of such a system is to reward and retain top performers, help middle performers become top performers, and replace the company's bottom performers to improve the overall results of the organization and drive new growth.

However, forced ranking has come under fire in recent years. Critics have said that forced ranking unfairly penalizes workers, breeds backstabbing among colleagues, and gives preferential treatment to certain employees, among other disadvantages.

But the truth is, forced ranking can be done well. It can also be done poorly. Execute it well, and you can end up with an organization that excels. Execute it poorly, and your organization could be plagued by the problems I mentioned above.

We're big fans of forced ranking at Stroll, and we believe our results show we do it well. Here's how our process works, the benefits we're seeing from it. We recommend you follow a similar path in your organization to achieve similar positive results, or use this to build your own forced ranking system that generates even better outcomes.

The process

We group employees into the top 20 percent (A Players), middle 60 percent (B Players), and bottom 20 percent (C Players) according to how well their performance embodies each of Stroll's five core values. For instance, we look at our "strategy-mindedness" value, and identify the 20 percent of employees who exemplify it the most, the 60 percent who exemplify it somewhat, and the 20 percent who exemplify it the least.

To determine where employees fall, we've assigned certain behaviors to each value that we believe demonstrate the embodiment of that value. Continuing with the example, someone who is strategy-minded would attend other teams' meetings to remain cognizant of and involved in overall company strategy, and be able to describe our operating plans on the spot. An employee that does these things well often lands in the top 20 percent for strategy-mindedness.

We repeat this process for our other four values -- mental toughness, ownership thinking, results-oriented, and being the best. Employees can fall into different buckets depending on how well they perform each value. For instance, someone who falls into the top 20 percent for strategy-mindedness could fall in the middle 60 percent for mental toughness.

Once we bucket employees by our core values, we then group them according to their results. We evaluate two aspects of their results: whether employees' output was done on time, on spec, and strategy, and the size of that output in terms of contribution margin. Again, we evaluate results using specific criteria and numbers, which helps ensure our assessment process is objective.

Still, we recognize managers can't see everything employees do, every initiative they take, and every win they bring home. That's why every employee ranks themselves in the same manner I detailed above to further ensure our process is fair.

Employees can self-reflect, and evaluate how they see their performance compared to their colleagues, which in turn helps them see strengths they can build upon as well as areas for improvement. In addition, employees' self-evaluations provide our managers with crucial insight into their performance that they might have missed.

Once the rankings are complete, we determine how to help each employee improve or strengthen their performance. We reward A Players through pay increases, promotions, bonuses, and other incentives. We also support their continued performance by ensuring they have ongoing leadership opportunities, such as managing high-profile projects and engaging in strategic decision making.

We help B Players become A Players by telling them what they need to do to hone their leadership skills and improve certain results. At Stroll, this is where our performance optimization plans play a crucial role. These plans, which I've blogged about before, provide a road map to guide employees to improved performance.

We also use performance optimization plans to help C Players become B Players. If these employees are not progressing after an appropriate time period, we consider replacing them by following proper HR measures.

The results

Our forced ranking process has several benefits, beyond the obvious ones of raising the performance bar and creating an all-star team, such as:

Keeps performance evaluations fair. Many companies that are against forced ranking believe that it can lead to unfair and biased evaluations. We certainly do not support unfairness or bias. That's why we advocate taking an objective approach by measuring performance using hard and fast behaviors and metrics. This method lets you level the playing field among employees and keep the process fair.

Fosters transparency between managers and employees. Every team member understands our ranking process and how their performance is measured. This is another crucial difference between Stroll's forced ranking system and many other systems that have been criticized for engendering feelings of bitterness, resentment, and offense among employees. We painstakingly ensure employees fully understand how our forced ranking system works, which has virtually eliminated confusion about who gets ranked where and why.

Promotes candor. Once we group employees, we meet with each individual to discuss their performance and how they rank. Nothing is a secret. Our employees know exactly where they stand in the company. We disclose all of our feedback to employees, which promotes candor and builds trust between team members and managers.

Mitigates performance issues. In these meetings I just mentioned, Stroll managers also discuss any performance problems with employees. Everything is put on the table, which lets us work together with employees to correct problems right away, rather than leaving problems to develop into larger issues that could compromise employees' positions in our company. Again, this is another advantage that many forced ranking critics don't understand. Our goal is to support employees, correct problems, and improve performance. Open and honest conversations with employees are vital to achieving this goal.

Motivates employees to excel. Unlike some forced ranking systems, our approach supports employees in their efforts to excel, and does not tear them down. We want our employees to perform better, and we recognize that performance optimization requires attention, support, and nurturing.

Reinforces company values. Some forced ranking systems can breed competition and backstabbing among employees. But our forced ranking system is tied to our company values, which are the fundamental principles that bind our team and guide our course. As a result, we are motivating employees to uphold values that foster team spirit and positive attitude, rather than pitting them against one another in a combative working environment.

Drives personal development. When employees rank themselves, they can reflect on their performance and achievements. This exercise helps employees identify their strengths, weaknesses, and areas of improvement. From here, employees have insights they need to set personal goals that lead them to achieving better results.

All these benefits feed into the ultimate goal of fueling company growth. It's not just people who are your company's greatest asset. It's the right people who are your greatest asset. Not everyone has the ideal mix of knowledge, skills, talents, personality, and attitude to fit your culture, needs, and goals. But a forced ranking system like the one we use at Stroll is a positive, productive way for achieving the team that uniquely suits your company, is adept at driving growth, and propels you to success.

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