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 / Third Quarter 2002 / Issue 28(originally published by Booz & Company)


The Folly of Forced Ranking

Managers aren’t likely to get much insight into who is working below standard from employees’ self-assessments because most people do not feel that they are poor performers. In fact, my research shows that when asked to rate their performance, more than 80 percent of employees feel that they are average or better performers. Even if someone knows he is having performance problems, he is unlikely to ask for help because he knows it could make him a candidate for dismissal.

Mr. Welch, nonetheless, argues ardently that it is important to win the war and to keep eliminating the poorest-performing 10 percent no matter how hard it is to find them. He does not worry about whether managers are comfortable with the process except to argue that managers who resist doing it probably are not good managers and may themselves be in the bottom 10 percent.

Costs of Turnover
Even if a reasonably effective job can be done of identifying the bottom 10 percent, the cost of turnover alone makes the practice problematic. Any turnover, whether forced or voluntary, can be expensive. In fact, mandated turnover may be particularly expensive because it often requires the continuation of benefits and may result in lawsuits and large settlement payments. Finding good replacements, training them, and waiting for them to develop the relationships and knowledge necessary to be fully productive employees is expensive. Thus, in many cases, the smarter and more cost-effective solution is to diagnose why someone, especially someone with years of experience and deep relationships, is underperforming, and to give that person a chance to correct the situation.

Many studies on the actual cost of turnover suggest it frequently is equal to at least one year’s salary of the replaced employee. Further, unless the employee who is let go is clearly inferior, the new hire may be no, or only slightly, better. In this instance, all the company has done by dismissing its “lower 10 percent” is set in motion an expensive termination and hiring process. With so much potential for error, it may take a long time before the organization gets a financial return on replacing poor performers. This is particularly true if the work the dismissed employee does is complex and involves extensive new training and adjustments for co-workers.

Finally, in some labor markets, there simply are no people, much less better people, available to replace employees who are let go. Although the availability of people depends on economic cycles and the departing employees’ skills, it is likely to be difficult to find good candidates for knowledge-work jobs in such growth industries as information technology, biotechnology, and professional services. Even if better people are available, they may not be hired because most selection processes do not effectively identify the best candidates. Thus, even when firing someone rids the organization of a below-average performer, it may not make sense to dismiss the existing employee.

Managers’ Reactions
Managers who are required to get rid of a fixed percentage of their peopleoften try to beat the system because they think it is dysfunctional, or because they find the whole process distasteful. For example, to meet their reduction number, managers may keep bad employees around until the performance-rating period, instead of firing them earlier in the year, so that they will have people to select when it is time to make the cuts. And if managers have more candidates than they need to meet their quota one year, they may retain the “extras” as targets for the next round of appraisals. There are also examples of managers creating false employee performance records so they can justify firing them.

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