GE made famous the ‘stacking’ system where employees are ranked against each other. A pre-ordained proportion is rated at each level and, at least in GE’s case, the bottom X% lose their job. To some this is brutal, forcing employees into a gladiatorial battle against their colleagues. To others it is salvation, releasing companies from the dead weight of mediocrity.
In a psychological experiment, people were randomly divided into three teams all of whom were set the same tasks and where their appointed managers had to agree performance scores afterwards.
In one team the managers used stacking (also known as “forced distribution”), in the second they were free to rank as they wished and in the third they used “guided” distribution, which is like forced ranking but with blurred edges – so they could give a few more a different rating than strict forced ranking would allow.
The results were emphatic: the teams rated with guided distribution outperformed the other two.
This experiment is a neat answer to the question, is ‘forced distribution’ good or bad? Only, it is rather too neat.
When a company has had forced (or even heavily guided) distribution for many years, two things tend to happen. First, many of the poor performers have already left and so perfectly good people are rated as ‘poor’ simply because they are the least good in a very high performing team.
If they are then ‘encouraged’ to leave, this not only wastes talent but also puts off highly competent potential recruits.
Secondly, and more perniciously, people may seek out poor performers to work with so they can secure for themselves a higher rating, which is the last thing you want to encourage.
Equally, in companies where there is no history of differentiating between different levels of performance, everyone tends to be treated the same.
The result is a phenomenon called social loafing, where people realise that there is little to be gained by working harder or achieving more and so start to slacken off.
When their colleagues spot this and realise there are no consequences, they ease off too and so the cycle continues.
The late Liberal MP, David Penhaligon, used to tell the story of a mother who came to his surgery indignant that the school head described her son’s performance as ‘below average’. It took many cups of tea, he would recount, to convince her that this was true of half the children in the school and so she had no need to worry.
The key to effective performance management is to have managers who, like this school head, have the courage and acuity to call performance as it is.
Microsoft and Yahoo! are both right in their choice of how to rate performance. In the former, the chaff has been sorted and long since left the campus, whereas in the Woodstockian world that was Yahoo”, ‘anything goes’ has gone on for too long.
What will matter far more in these companies, and the many others that grapple with a similar challenge, is how managers praise, coach, advise, challenge, motivate, connect and empathise. Whatever the system, it’s the conversation that counts.
Octavius Black, CEO, Mind Gym (www.themindgym.com) was shortlisted for EI Business Commentator of the year. Follow him on Twitter: @octaviusblack