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


The Folly of Forced Ranking

Effective Appraisals
Before managers are asked to identify poor performers, it is critical that organizations create effective performance management systems. Balanced Scorecards and enterprise resource planning systems are two resources that can be used to increase the amount and quality of data that managers have to use for performance measurement. If executives lack performance appraisal skills, they need to be trained, as do the individuals who are being appraised. Both need to know how to behave and what to expect.

Managers should be evaluated on how well they measure the performance of their subordinates, and their bonuses and career development need to be tied to the quality of their appraisals and to how well they develop their employees. For example, one company’s annual leadership-development assessment of its top-level executives identifies “effectively dealing with problem performers” as a critical characteristic in determining who is given the highest performance rating.

Companies also need to develop effective ways to assess nonfinancial or hard-to-quantify activities. It is one thing to evaluate the results of sales professionals with similar territories and production workers with quantitative output goals; it is quite another to measure the performance of knowledge workers who operate in teams to produce such hard-to-measure output as software code, new product ideas, and advertising campaigns. Inevitably, the assessment of knowledge workers is a subjective one. It has to depend on a supervisor’s ability to effectively set clear goals along with hard and soft measurements that identify and track the development of the software, new products, and ad campaigns. Performance then needs to be rigorously assessed against goals, with input from peers and customers that closely examines the performance of each individual.

Cross-calibration meetings are a good way to ensure that appraisals are done properly. Typically these meetings are an annual event that brings together groups of managers who rate the relative performance of the individuals who report to them. In these meetings, a hundred or more employees are reviewed, and their final performance ratings are determined by their appraisals and the performance of their work units. Individuals from different work areas are compared based on data from their bosses and others. This process helps ensure that all employees, regardless of the strength of their particular area, are rated consistently throughout the organization. It may well be that a manager does have universally outstanding employees and rates them accordingly. But that manager must be able to defend this assessment in a meeting of his or her peer managers and executives. In essence, this process is a way to avoid the “good group/bad group” problem that exists with forced distribution systems.

Having an effective performance management system and making good judgments about which employees to retain, which to dismiss, and which to develop are likely to become an increasingly critical organizational capability. Ideally, recognition of the importance of this capability will cause organizations to move beyond rigid rules and policies to systems and practices that are led by managers who think of their people as capital, and who make educated, thoughtful decisions about how to increase their value.

Reprint No. 02304

Edward E. Lawler III, [email protected]
Edward E. Lawler III is the director of the University of Southern California’s Center for Effective Organizations and a Distinguished Professor of Business at USC’s Marshall School of Business. Professor Lawler specializes in the study of human resources management, compensation, and organizational development. His previous contribution to strategy+business was “From Meek to Mighty: Reforming the Boardroom,” written with Jay A. Conger.
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