Performance Appraisal 

Why Employee Ranking Systems Lead To Disaster 

Summary: Since Jack Welch, at General Electric used employee ranking to make decisions about how to fire the lowest ranked employees, more companies have moved to a ranking system. The problem is that it's mathematically unsupportable, can result in having a less able workforce than when you started, and puts employees in a position where their interests are served if their colleagues FAIL. Learn more about the problems.

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In our white paper entitled "Performance Management -- Why Doesn't It Work we discuss some reasons why most performance appraisal systems fail to add value to organizations. Despite our work, and the work of more illustrious experts such as Deming & Scholtes, most people believe in the usefulness of performance management. In a way that's understandable, since it CAN succeed in the hands of an excellent manager, and the importance of performance management has been stressed for decades in much of the management literature. 

What is more perplexing is the continued use of ranking methods to evaluate employees. Ranking employees, particularly for determining promotion, and pay, or even for providing developmental feedback simply makes no sense. It is not a neutral process, or just a costly process--it is a recipe for disaster. This month we look at why this is so. (Next month we will take on the use of rating systems). 

Rankings In Appraisal 

The core element of the use of rankings is that employees are compared to each other, and given some number that supposedly indicates whether they are better than, about the same, or less effective than their colleagues. That ranking is often used to determine who will receive pay raises from a limited pool of money, or for other decision-making processes. 

The criteria for ranking can range from specific and objective to totally fuzzy and subjective. For example, it is possible to rank sales staff objectively, in terms of the sales generated in a year, and identify the top salesperson, the next best, down to the bottom based on some reasonably meaningful numbers. Or, one can rank people on a set of fuzzy criteria such as "gets along well with team members".  

The Arguments In Favour 

There are only a few arguments to support the use of rankings in any plausible way. The major argument appears to be that ranking employees versus each other creates a situation where competition can be encouraged--the assumption being that if staff compete with each other they will push each other to greater productivity.  

The second argument is more administrative. Organizations that rely on merit assessments for decision-making on pay levels and promotions need to decide who will get what. Proponents of ranking systems suggest that rewards for productivity should go to the top performers as defined by comparison with their peers. So a ranking system allows organizations to decide to reward the "top 25%" or the "top 10%". On the surface this makes some sense. Given a limited pool of rewards, shouldn't the rewards go to the top performers in the organization? We'll see. 

The Arguments Against 

Let's counter the administrative argument first. We want to reward people for the value they contribute to the organization (however that might be defined). The catch is that a ranking system doesn't do that. It rewards for being better than one's peers, and that's a very different thing. The easiest way to show this is to look at an example. We are going to use a sales example with rankings by total yearly sales, because that's a best case scenario, since we can measure sales objectively. If ranking systems don't make sense there when we have good data to guide the rankings, they aren't going to work with more fuzzy ranking criteria. 

Let's take a small group of five people with sales figures as follows: 

Bob $25,001 
Ken $25,000 
Mary $24,000 
Barb $23,000 
Fred $20,000 

Our system calls for rewarding the top 20% (one of the staff) with a significant pay raise, while giving a small "average" reward to the middle 60%, and giving no reward at all for the person at the bottom. 

Bob gets a big raise while Ken, Mary and Barb get a little, and Fred receives nothing. Does this make sense? No. 

If we look at the figures, we see that we are rewarding Bob for his ability to be one dollar better than Ken. In fact the difference among all of the salespeople is small...and this isn't surprising since we assume a reasonable job selection process where only the best are hired and retained. So what we are doing here is making important decisions based on almost no differences in production because our "system" specifies that we must reward the top 20% with no room to evaluate the absolute contributions. 

Apart from the fairness of this, what effect might it have on the performance of Ken and the others?  

But here's the real kicker. Let's look at the value that each of these people contribute to the organization. Let's assume that each of the sales staff draws a base salary of $30,000 a year. When we look at the absolute value of each staff member, we see that NONE of them are adding value. They are costing the company more than they are earning. Under a strict ranking system we would still be obligated to pay that top performer his raise, even though Ken is simply the best of the really lousy! 

Ranking systems don't assess value and contribution, even in a best case scenario. 

The other argument put forth is that ranking systems encourage competition, and that is probably true. The error with this argument is that it assumes that competition will lead to increased productivity, and increased success for the larger organization. This is rarely the case. Why? 

Quite simply, we tend to get the kinds of behaviour we reward. We can set up a system with good intentions, but unintentionally encourage behaviour and actions we don't want. Ranking systems (and related reward systems) allow for two ways to "win" extra rewards. The first, and the one we would like to see most is for people to work harder, better and smarter and become more productive. By being more productive they can vault over their lesser performing colleagues to receive additional rewards. The second possibility is to contribute to degrading the performance of those competing for the same reward. An employee can vault into the upper echelons of ranked performance by helping others do worse. 

This is certainly NOT what we want.  

While it is only the most cut-throat employees who will deliberately attempt to reduce the effectiveness of colleagues, the use of ranking and related rewards does push even "nice" people into doing things damaging to the organization. If you reward based on relative ranks, you encourage: 

1. hoarding of resources so they are "there when needed" 
2. with-holding of information 
3. reduction of team-work and helping others 
4. and generally self-centred and self-serving actions. 

Other Considerations 

 

1) While ranking may seem to provide an objective means of evaluating (since it can be used to assign numbers to people), the rankings themselves are only as good as the criteria used for ranking. They can be extremely deceptive, making it appear that there is an objective valid evaluation process going on when, in fact, there isn't. 

2) The value of an employee RELATIVE TO PEERS, is irrelevant to the success of any organization. It matters not a bit whether a person is the best or the worst. What does matter is their absolute contribution to the goals of the organization. Ranking doesn't improve organizations. It only classifies people and does not reflect the actual value of employees. 

3) As a form of feedback ranking is virtually useless. If our goal is to develop people, we need to provide specific concrete feedback. Informing someone that they ranked in the top (or bottom) twenty-five percent on something may send some sort of message, but tells the recipient virtually nothing about how to improve. 

4) Ranking can be devastating to the morale and trust of an organization. Because it is difficult to rank objectively, employees will almost always disagree with a ranking that places them anywhere but in the top percent in the organization. Employees often perceive the process as unfair and arbitrary. Research has shown that the large majority of people believe they are above average in job performance. Ranking guarantees disagreement. 

5) Finally there is the issue of comparisons. In today's work world, even people with the same job titles in the same "shop" may be doing very different jobs and contributing in very different ways. How is it possible to compare someone who functions as an informal workplace leader to someone who is technically talented but interpersonally unskilled? Both contribute in their own way. It really is like comparing apples and oranges.  

The Disaster Part 

If some lunatic was to ask you to create an organization full of dissent, back-biting, resource hoarding, secretiveness, lack of trust, etc, you probably would choose to use a ranking format for performance management. You would also have an organization that wouldn't know who was contributing to the company in any absolute terms and an organization that would have considerable difficulty providing developmental feedback to staff for the purposes of improving performance. 

As a final note, somewhere on this planet there are people who use rankings and swear by them. It may be they aren't looking in the right place to evaluate the overall effects of such a strategy. In rare cases, it may be that they are in fact building positive outcomes. As with many performance management techniques, however, where you find a manager succeeding with a ranking system, we guarantee you will find a manager who would succeed with scribbling performance appraisals on toilet paper. In other words, in spite of the system!