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


The Folly of Forced Ranking

Forced ranking systems also influence how managers develop their employees. It hardly makes sense for managers to invest in developing individuals who are marginal performers when they believe that, in a relatively short time, they will have to eliminate them. Instead, they invest development dollars and personal effort in individuals who are likely to survive the annual performance assessment and firings. The result is that the best get better, while the poor performers have little chance to grow and improve.

Forcing annual turnover can also cause regrettable turnover of very good people if it is not balanced by a focus on the best performers. When managers are preoccupied with identifying the least productive people, they may fail to give enough encouragement and support to better performers. A recent study at one major global pharmaceuticals manufacturer that uses the forced distribution approach determined from exit interviews that several hundred people in its worldwide finance organization who had been identified as top performers by their managers left because they felt undervalued.

Managers tend to disown the appraisals and blame the quota system when they are forced to identify poor performers. They say to those individuals, “Well, I know you’re not really a bad performer, but I have to identify somebody, and you are the unfortunate one.” Supervisors thus discredit the entire appraisal system by not taking responsibility and significantly contribute to negative perceptions of the system among employees.

Forced firings also create an unhealthy competition among peers. When employees in a work area compete with each other for ratings, knowing there is always a percentage at the bottom who will be forced out, it creates fear and selfishness. People are much less likely to help each other, train each other, share information, and operate as an effective team. In today’s flatter, knowledge work–driven, more team-based organizations, this can take a significant toll on organizational performance.

A better way of dealing with poor performance starts with replacing bureaucracy and rules with leadership and judgment. Companies that require managers to fire a certain percentage of poor performers every year are simply imposing a rule to try to correct for the poor leadership behavior of managers. Senior management needs to take talent management extremely seriously, including leading a rigorous annual evaluation of the performance appraisal process itself. Human-capital management decisions need to be the outcome of a senior management–led analysis of the business situation, the capabilities and performance of the organization, and the business strategy. None of this can be done effectively when managers are forced to comply with an arbitrary bureaucratic guideline.

At the core of an effective appraisal system is a process that ensures all individuals are accurately assessed on their current performance and their potential. The system needs to go beyond simply measuring performance; it needs to expose the causes of poor performance. And appraisal procedures, corporate culture, and senior leaders’ actions need to encourage managers to work hard to find solutions other than dismissal.

Some of these solutions may seem painful initially, but they can, in the long run, prove to be fruitful for the individual and the company. For instance, when poor performance occurs because a person is the wrong fit for a job, the best action may be to move that person to a new job, even if that means a demotion. Alternatively, a development plan may be needed to improve the individual’s skills. If motivation is a problem, a cut in pay with the promise of an increase if performance improves can be a strong motivator for doing better. Finally, in a tight labor market, a manager may want to think twice before letting someone go even if his or her performance isn’t as good as it should be.

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