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(originally published by Booz & Company)


Getting Rid of Grades to Boost Performance

The practice of assigning letter grades to jobs has had perverse consequences. Aligning jobs with accountability is a much better idea.

Most companies grade their employees’ jobs using some kind of ranking or rating system based on job evaluation. The grades assigned are intended to assess fair pay for people doing the same work, and are usually public, like the letter grades of schools. In theory, these systems are supposed to help people manage their careers, by providing a comparison of jobs and individuals’ competence across a large organization. But in practice, they have a terrible side effect: They end up adding to the costs of bureaucracy, frustrating employees, and undermining leadership development. The good news is that by changing this single factor in the human resources equation — replacing job grades with a system based on job accountability — companies can reverse many of their ill effects, reduce costs, and improve performance.

The problem is that job-grading systems at many companies migrated over time into the domain of organizational design. That’s because most companies base their job grades on a points system: Points are allocated for size of budget, sales, and number of subordinates. This gives managers a tremendous incentive to increase budget and staff — both for themselves and for everyone reporting to them. Since the easiest way to do this is often to insert another layer in the hierarchy, job grading ends up creating unnecessary and counterproductive layers of management.

Job grading has an equally pernicious effect on leadership development. This is because bosses assign promotions based on grades rather than on value provided to customers, and set up the system so that they can continue to promote potential leaders rather than risk losing them. By adding enough rungs to the management ladder so that everyone can keep moving up, they end up designing the whole organization to make room for the people who have been promoted.

The heart of the problem in grade-driven organizations is that the three key pieces of the employee puzzle become disconnected: the layers in the hierarchy, the accountability to customers, and the employees’ job grading. By reorganizing to bring those three pieces together and abandoning job grades, companies can save a great deal of money, be far more effective, and give their employees more job satisfaction.

The year 2008 saw many banks around the world stumble and fall. One key reason was a lack of accountability throughout management. It’s no coincidence that banking is one of the industries in which job grading is most prevalent, and where it has led to institutionalized over-layering. For example, my colleague Adam Pearce and I worked with one bank whose operations could justify four layers of management based on clearly identified levels of accountability. But the bank had created, over time, six different managements layers, which had led to a silting up of the structure. We have worked with many banks in a number of different countries, and all, without exception, were overmanaged in this way: Many managers had very limited roles that lacked true accountability. And all these banks used job-grading systems.

Bringing Back Accountability
The starting point for change is to get rid of the current, grade-based system of job evaluation — at least as far as promotion and the hierarchy are concerned. Limit rankings and ratings to help identify fair compensation, in comparison with others at the same level in the same job, but no more than that. For all other managerial and organizational purposes, create a system of clear levels of accountability.

Accountability entails being answerable to another person for a product, process, or result that is measurable in terms of quantity, quality, and time. When reviewing an employee’s role in an accountable system, three key questions should be asked: First, why does the job exist? Does it ultimately add value for the customers? (By “customers” we mean anyone who benefits from the organization’s work or products, including the patients of a hospital or the beneficiaries of a government agency.) Second, for what is this person held to account? Finally, how well does this individual fulfill that accountability?

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  1. Brian Dive, The Accountable Leader: Developing Effective Leadership Through Managerial Accountability (Kogan Page, 2008): The implications of clear accountability for leadership.
  2. Brian Dive, The Healthy Organization: A Revolutionary Approach to People and Management (Kogan Page, 2004): The problems that result from poor organizational design.
  3. Brian Dive, David Mader, and Adam Pearce, “Leadership Levels — Empowering Leaders to Deliver Customer Service,” Booz Allen Hamilton white paper, February 2008: Case study of an organizational redesign of a major U.S. utility company by Booz Allen Hamilton and Panthea Strategic Leadership Advisors.
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