FORCING THE ISSUE

by Raj Ramachandran

Major US corporations and their executives have invested heavily in strategies to create a high-performance organization, and the use of employee appraisal systems has been a key mechanism for monitoring performance within these programs. Almost every major Fortune 2000 company has used some form of a performance appraisal system where people are evaluated annually on goal attainment (Fortune, 2005).

Standard performance appraisal systems basically compare individual levels of achievement against the goals and objectives that were set. However, one of the major concerns of executives and HR managers is how to build differentiation into the system in order to more accurately capture relative performance data compared to peers.

According to our research, the use of forced ranking has been a highly-used and controversial instrument for introducing this differentiation into the system, since it assigns an individual rank to each employee within the context of the department or organization. In fact, according to a Drake University study, as many as a quarter of the Fortune 500 companies, including General Electric, Cisco Systems, Hewlett-Packard, Microsoft, Lucent, Conoco, EDS, and Intel, may be currently using some type of performance management system built around the principle for forced rankings (Smith, 2006).

This article explores the issues surrounding the use of forced ranking systems, and discusses the key components, pros and cons and areas of dispute relating to whether or not this is an effective mechanism to improve the performance of an organization.

What is Forced Ranking?

Forced ranking, also known as forced distribution, is essentially a performance management mechanism that requires a ranking of all employees to identify the relative performance of each. The object of forced ranking is to employ only A players, and therefore B and C players must be coached to become A players, or moved into other jobs where they can be A players. Employees who are unable to make this transition may be eliminated from the organization. In many cases, there is a required turnover of the lowest-performing group of employees each year.

Typically, when forced-ranking systems are applied, strict percentages (such as top 20%, vital 70% and bottom 10%) are set in a standard bell-curve model in order to slot the employees as either A, B or C players.

Ranking is Honest

Advocates of the strategy cite numerous reasons for including forced ranking as a mechanism to develop a high-performance organization, such as:

• Rewarding the high performers
• Promoting based on merit
• Speaking and interacting honestly with employees
• Promoting a culture based on achievement
• Eliminating the worst performers

Recognizing individual performance is believed to be the only honest approach since team members will already be aware of who the low performers are, and therefore should not be surprised by the ranking results. A forced ranking system based on performance also shows organizational commitment to helping those that achieve, and promote the development of an organizational culture that does the same.

Another argument for forced ranking systems is that it acts as a succession planning tool, allowing organizations to replenish the supply of qualified talent. Proponents claim that the forced ranking approach, because it is merit based, is far superior to the traditional succession planning process in which executives groom "back-up" candidates for key management positions. In fact, a specific term – TopGrading - has been coined by Brad Smart to describe the process of applying the concept of forced ranking in a corporate setting as a mechanism for identifying the best potential candidates for the succession pipeline.

Where is the Love?

In contrast to business arguments for the practice, detractors of the forced ranking strategy state that it has a variety of critical defects. For example, organizations who implement forced ranking systems are likely to degrade team efforts and encourage an 'each person for him/herself' attitude. Another critique of forced ranking systems resides in the erosion of social capital, which refers to the combination of skills (the ability to help), teamwork (the ability to work together), and the zeal to help. It is believed by many that the constant pressure of a forced ranking system can cause morale to decrease, thereby creating a negative effect on productivity, retention and innovation.

Another key ethical concern that arises in this process revolves around using a system that utilizes the firing of a certain number of underachievers as the basis for being the best way to create a high-performance organization, (although the forced ranking process does not necessarily dictate that C graded employees need to leave the organization). The legal ramifications alone of inappropriately using termination quota systems have caused some organizations to abandon the use of forced ranking altogether. There have also been several documented cases of class-action lawsuits that focused exclusively on the validity of forced distribution appraisal systems, which has made many organizations rethink the use of the tool.

Key Implementation Considerations

If your organization is considering to implement a performance rating system based on forced ranking, careful implementation considerations is vital, not only to assure effectiveness, but also to assess program strengths and weaknesses and to redress the weaknesses. Organizations must spend a considerable amount of time up front addressing the following questions during the formative stages of the implementation process:

• Time Frame – should forced ranking systems be implemented year after year or only during key company transition events (i.e. mergers, acquisitions, divestitures)?
• Organizational Level – how far in the organization should the ranking process extend? Should it only include top leadership positions or for all people in management?
• Confidentiality - to what extent should a company publicize the fact that it is adopting a forced-ranking system? Should rankings be shared internally?
• Distribution Curve - should your organization stick with a normal bell-shaped distribution curve of the top 20%, middle 70% and bottom 10% or would you enforce the system where employees would be given the grade regardless of percentage quotas?
• Outcomes & Consequences – how does the organization determine the evaluation standards of A, B and C players? What happens once the process is complete? What does the organization do with those identified as C players? How are the A and B players rewarded and developed?

It is also important to consider that the primary strength of this process is the standardization of the evaluation criteria applied to all individuals (at the requisite level) across all organizational units. Therefore, any implementation plan should incorporate such a deliverable as part of the process.

Summary

The evidence is certainly mixed concerning the use of forced ranking as an effective mechanism for performance management. The disparate beliefs concerning the use of these systems stem from a fundamental disagreement about effective measuring criteria and the severity of actions taken to address low performance. While proponents recognize the value of honesty and a high performing culture, concerns remain as to the impact on culture when low performers are regularly removed.

Forced ranking systems are not a panacea and should be used in conjunction with other performance management and career development tools such as performance appraisals, training, mentoring/coaching, job postings, succession planning and tuition assistance. To demonstrate that forced ranking systems truly are a positive force to encourage performance - rather than simply punish low performance - these tools must be implemented together in a truly supportive structure that recognizes and rewards those that strive to perform.